Sunday, July 28, 2002

City & County of Honolulu

Feds want
Ewa profit back

The city must return
$1.2 million from Unity House's
sales of Ewa Villages homes

Ewa Villages timeline

By Rick Daysog

A federal agency has demanded that the city reimburse $1.2 million to a U.S. grant program after reviewing the city's scandal-plagued Ewa Villages housing project.

In a March 7 report obtained by the Star-Bulletin under a Freedom of Information request, the U.S. Department of Housing and Urban Development said the city must return the money or collect it from the nonprofit labor-run group Unity House Inc., which purchased 96 Ewa Villages housing lots from the city in 1998 for $9.2 million.

HUD, which financed $7.3 million, or more than three-quarters of Unity House's purchase, said the $1.2 million represents the income that Unity House earned on the development and sale of the 96 homes. Under HUD's financing terms, income from the sale of homes cannot be kept by Unity House and must be returned to the federal agency.

Mark Chandler, HUD's director of community planning and development for Hawaii, wrote that HUD could seek the repayment of the entire $7.3 million in federal funds used to finance the Unity House deal if the city does not repay the $1.2 million or it does not get the money from Unity House.

"The city needs to take immediate, corrective action to reimburse the community development block grant program account for $1.2 million," wrote Chandler, who declined comment for the article.

"Failure of the city to collect or repay these funds may potentially result in HUD determining that the entire project was in fact new housing construction and, therefore an ineligible use of community development block grant funds. Such a determination would require the repayment of the entire $7.3 million. ..."

City Deputy Managing Director Malcolm Tom defended the city's use of the federal funds. Tom said through a city spokeswoman that the city is negotiating with Unity House on various Ewa Villages issues, including the repayment of the $1.2 million.

Jim Boersema, a spokesman for Unity House and its development company Lokahi Greens in Ewa Inc., said he was unaware of the issues raised in the HUD report. He said that the city has not approached Unity House about repayment.

Unity House, which was founded by union leader Art Rutledge in 1951, is a nonprofit labor-sponsored organization which provides benefits for its union members and retirees. The organization originally got involved in the Ewa Villages project to build homes for its members.

Critics have cited Unity House's purchase as a sweetheart deal, which permitted Unity House to purchase the land with very little money while allowing the city to pay off millions of dollars in bonds issued on Ewa Villages.

For the city, HUD's criticisms represent the latest snag in its 11-year effort to revitalize the 600-acre historic plantation town, an effort marred by former city housing official Michael Kahapea's theft of more than $5 million in city relocation funds, lawsuits over construction defects, as well as federal investigations into Unity House employees.

It also comes as the city's budget has come under strict scrutiny by the Honolulu City Council.

The HUD report detailed other instances where the city allegedly mishandled federal funds on Ewa Villages. According to HUD, Mayor Jeremy Harris' administration:

>> Allowed Unity House to take $24,000 in escrow interest owed to the city. The money represents two months of interest payments on the $7.3 million federal grant while it remained in an escrow account. The city said the money was mistakenly sent to Unity House by its title company and that the city is taking steps to collect it.

>> Permitted Unity House to use a third of its $1.2 million profit, or $400,000, to pay for legal fees and fixes for construction defects, in apparent violation of HUD regulations.

>> Failed to disclose that it gave Unity House a $1.7 million, short-term loan to finance its share of the $9.2 million deal. The loan, when combined with the $7.3 million HUD grant, allowed Unity House to purchase the Ewa Villages parcel with little money down. Unity House repaid the city for the loan shortly after it completed its purchase of the Ewa Villages lots.

At one point, HUD ordered the city to return more than $5 million of the grant money used by Unity House. But HUD backed off the demand last year after the city presented an appraisal that showed that the land was worth $12.3 million, or about $3 million more than the amount paid by Unity House.

"Our review revealed areas of significant program weaknesses and violations," wrote Chandler. "We found the city failed to support its cost reasonableness decision when it provided ... funds to nonprofits to acquire city-owned properties in Ewa Villages."

In an apparent effort to curb HUD's criticisms, Tom traveled to Washington, D.C., on Jan. 10 with city attorney Greg Swartz to meet with Nelson Bregon, a HUD deputy assistant secretary who is responsible for community grant programs.

James Chang, an aide with U.S. Sen. Daniel Inouye's office, also attended the meeting.

According to a HUD spokesman, the meeting focused on the city's disagreements with HUD's monitoring report.

Tom's meeting came two days after former city Budget Director Caroll Takahashi responded to HUD's criticisms.

In an eight-paged letter to Chandler dated Jan. 8, Takahashi argued that many of HUD's findings weren't valid.

Takahashi, who recently left city government, also defended Unity House's purchase price, saying it was supported by an appraisal by Land Process Service Corp. that was conducted prior to the sale in 1997. That appraisal valued the property at $10.5 million.

She cited a second appraisal by LandPro dated November 2001, which valued the Ewa Villages lots at $12.5 million.

HUD, meanwhile, is questioning the methodology of the city's appraisal. According to Chandler, the city's appraisals are based on the total value of all 96 parcels after they were developed and sold on the housing market to individual owners. The appraisal should have treated the Ewa Villages parcels as a single bulk-sale of an undeveloped tract to a builder, he said.

"HUD does not agree that the likely buyers would have been individuals," Chandler wrote. "As a result ... the city financially gained from the sale, the community planning and development program took a loss on the activity and the city did not comply with program fair market value requirements."



The troubled history
of Ewa Villages

The $100 million Ewa Villages revitalization project was launched in 1991. Here is a chronology of events surrounding the controversial project:

>> March 1991: The city completes a community-based master plan for revitalizing Ewa Villages. The plan, developed by R.M. Towill Corp., called for 1,230 residential units, including 1,070 single-family homes and 160 multiple-family homes.

>> February 1993: The city enters an agreement with Campbell Estate to purchase nearly 600 acres that include the Ewa Sugar Plantation and its residential communities known collectively as Ewa Villages.

>> October 1997: City housing officials Michael Kahapea and Norman Tam are arrested on charges that they improperly awarded commercial relocation contracts to family, friends and associates. Tam dies of a heart attack before he goes to trial.

>> April 1998: Unity House agrees to purchase 153 lots in the parcel A section of Ewa Villages for $14.7 million. The purchase is financed by $7.3 million in community development block grants provided to the city by the U.S. Department of Housing and Urban Development.

>> August 1998: Unity House backs out of plan to acquire 57 of the 153 Ewa Villages lots. In the end, Unity House pays $9.2 million for 96 housing lots at Ewa Villages.

>> October 1999: The city sues the Estate of James Campbell and Amfac Inc., alleging the landowner and its lessee contaminated land at Ewa Villages.

>> August 2000: Kahapea is convicted on 43 counts of theft, money laundering, forgery and related charges.

>> April 2001: A federal grand jury subpoenas several city housing officials about the Ewa Villages case. No indictments are returned.

>> June 2001: Campbell Estate and Amfac agree to pay the city $1.3 million to settle its suit over toxic waste found at Ewa Villages.

>> August 2001: More than six dozen Ewa Villages residents file suit in state Circuit Court against developer Lokahi Greens in Ewa Inc., its architect, engineers and contractors for alleged construction defects.

>> September 2001: Another 21 Ewa Villages residents file a separate suit against Lokahi Greens and its engineering and construction firms for construction defects. The two suits are later consolidated.

>> November 2001: In a draft of its annual review of the city's housing programs, the local office of the U.S. Department of Housing and Urban Development tells the city it must return $5 million in block grants, saying the city "inappropriately gained" in the Ewa Villages deal. HUD later backs down from that request but orders the city to return $1.2 million in income.

City & County of Honolulu

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