Kukui Towers, Honolulu, HI

Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-08-28.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                       U.S. Department of Housing and Urban Development
                                   Office of Inspector General for Audit
                                 450 Golden Gate Avenue, P.O. Box 36003
                                  San Francisco, California 94102-3448

                                          August 28, 1996

                                                       AUDIT RELATED MEMORANDUM

MEMORANDUM FOR: Nicholas P. Retsinas, Assistant Secretary for Housing, Federal
          Housing Commissioner, H

THROUGH: Susan Gaffney, Inspector General, G

FROM: Gary E. Albright, District Inspector General for Audit, 9AGA

SUBJECT:      Interim Report
               Review of Preservation Activities
               Kukui Towers
               Honolulu, Hawaii

        In response to requests from your Deputy Assistant Secretary for Multifamily Housing
Programs and Senator Inouye's office, we are performing a review of preservation activities at
Kukui Towers. Although our review continues, the selection of the priority purchaser for Kukui
Towers appears to be contrary to existing requirements and lacks the requisite resident support.
Also, the $40 million capital grant attached to the preservation efforts appears to exceed the
current value of Kukui Towers. Since the capital grant for Kukui Towers will be recaptured by
September 30, 1996 if the sale to a priority purchaser is not accomplished by that date, your
immediate attention to Kukui Towers is essential.


         Kukui Towers is a 380 unit building currently insured under Section 236 of the National
Housing Act. It is co-located with another, mirror-image 380 unit building, Maunakea Towers,
insured under Section 221. The owners for both buildings are THC-Ginza Joint Venture. In order
to preserve affordable housing at Kukui Towers, HUD agreed to provide a $40 million capital grant
tied to the sale of the building to a priority purchaser. The current owner agreed to a mandatory
sale, which requires (in HUD handbook 4350.6, paragraph 7-4) acceptance of the first bona fide
offer from a qualified resident organization or community based organization (CBO). The owners
chose to refinance Maunakea Towers under Section 223(f) of the Act, and this building did not
qualify for preservation.

        The bona fide offer from any priority purchaser requires support from a majority of the
existing residents. When the first bona fide offer is received and accepted, the property sale and
capital grant is then contingent upon the priority purchaser's submission of an acceptable plan of

       For preservation purposes, the property sales price is determined by calculating the best
and highest use - recognizing that the best use may not be affordable housing.

                              INTERIM RESULTS

The HUD Hawaii State Office did not require the owner to accept the first bona fide
offer from a priority purchaser.

         The Kukui Towers Resident Council submitted the first offer to the owner on March 6, 1996,
proposing to submit its earnest money deposit to the escrow company upon the owner's
acceptance of its offer. The owner rejected this offer because (1) the Resident Council had not
submitted its earnest money deposit with the offer, and (2) the resident support petition did not
identify the intended type of homeownership. Our review (of HUD handbook 4350.6, paragraph 7-
7) indicated that the Resident Council's support petition met HUD requirements.

       Instead, the owner accepted a March 19, 1996 offer from a CBO, Hui Kauhale, Inc., an
organization created by Ecumenical Association of Housing (a California based nonprofit
organization). The owner accepted Hui Kauhale's offer without the earnest money deposit.

        The Resident Council submitted the earnest money deposit on March 27, 1996, but found
that the owner had already accepted the CBO's offer - conditioned on the determination that Hui
Kauhale qualified as a priority purchaser. The owner reportedly received the CBO's earnest
money on March 26, 1996.

        The HUD Hawaii State Office concurred in the owner's rejection of the Resident Council's
offer, and the owner's acceptance of the CBO's offer as the first bona fide offer.

        Hui Kauhale's board lacked the required 1/3 representation by local members, so did not
qualify as a priority purchaser. To correct this condition, Hui Kauhale created Kukui Kauhale, Inc.
to purchase Kukui Towers. HUD approved Kukui Kauhale as a priority purchaser on March 29,
which was (1) three days after the owner accepted the CBO offer, and (2) two days after receipt of
the earnest money deposit from the Resident Council.

       On May 21, 1996, HUD concurred in the owner's selection of the CBO's offer, even though
HUD documents through May 7, 1996 raised questions of the CBO's eligibility at the time the
owner accepted the offer.

The HUD Hawaii State Office did not adequately review the resident support petitions
before accepting the owner's selection of the CBO's offer.

         HUD handbook 4350.6, paragraph 7-7E, states the CBO will submit a resident support
petition that represents a majority interest in the CBO. Paragraph 7-9B requires HUD to determine
if the petition is acceptable.

         When both the Resident Council and the CBO provided evidence of resident support for
their respective offers, it was clear that HUD's followup review was essential. Both the CBO and
Resident Council reported a majority of resident support.

        Allegations of coercion to sign support petitions were presented by residents to HUD and
local and federal elected officials, but HUD took no action before concurring in the CBO's offer. On
April 10, 193 Kukui Towers residents provided HUD with written requests to withdraw earlier
support for the CBO.

        In July 1996, HUD reviewed the CBO's resident support petition and found 65 invalid
signatures out of the 301 listed, but considered the balance to remain a majority interest. Our
review revealed that:

       - at least 53 of the residents that withdrew support from the CBO on April 10 had been
included in the original petition.

        - at least 36 signatures were either individuals not on the rent rolls or could not be
distinguished as a current resident.

         Our review indicates the CBO lacked support from a majority of the 380 units (narrowed to
one signature per unit). In fact, our analysis indicates that only 40% of the units supported the
CBO's petition. Aside from our analysis, HUD's July 1996 review did not consider the 193 units (by
itself a majority) which formally withdrew support for the CBO on April 10, 1996.

HUD provided a $40 million capital grant to preserve affordable housing at Kukui
Towers although the grant appears to exceed the property's current value

        The sales price for Kukui Towers is approximately $51 million, as calculated under
preservation procedures. However, co-located with Kukui Towers is Maunakea Towers, which is a
380 unit, mirror image building. The HUD Hawaii State Office staff reported that the current
appraised value for Maunakea is approximately $23 million. Also, HUD Hawaii State Office staff
reported that Kukui Towers, based on a current appraisal which would consider preservation
procedures, would result in a sales price of $10 to $15 million less than the current sales price of
$51 million. Basically, the $40 million capital grant preserves affordable housing for a building that
is worth less than the grant.


       Our interim results indicate that HUD did not adequately monitor the preservation activities
at Kukui Towers. The three significant concerns disclosed to date are:

       - HUD allowed the owner to accept other than the first bona fide offer from a priority

        - HUD did not assure majority resident support for the CBO.

        - HUD is vulnerable to substantial criticism for providing a $40 million grant to Kukui Towers
for preservation when it knows that Maunakea Towers is worth $23 million and knows that Kukui is
overvalued by $10 to $15 million.

      While your staff in Headquarters agreed to delay closing the sale of Kukui Towers until
September 25, 1996, the cited concerns remain unresolved. If closing is not achieved by
September 30, 1996, the capital grant for preservation will be returned to the U. S. Treasury.

        Aside from the ongoing concerns expressed by residents of both Kukui and Maunakea
Towers, we have today received calls or correspondence from the CBO, Resident Council
consultant, Senator Inouye, and your staff in Headquarters and Honolulu. The time available to
address the preservation concerns at Kukui Towers is short, and our recommendations for action


        We recommend that you return the Kukui Towers capital grant funds to the U. S. Treasury.

       As an alternative, if you can justify the effective use of the capital grant funds for
preservation when the property value does not appear to support the grant amount, we
recommend one of the following three options:

1. Arrange for a vote by Kukui Towers residents to determine majority interest in either the CBO or
the Resident Council as the priority purchaser. The winner would have to submit a plan of action
for HUD approval by September 30, 1996.

2. Arrange for assignment of the $40 million capital grant from the CBO to the Resident Council,
and proceed to closing prior to September 30, 1996.

3. Arrange for a mutually agreeable joint venture between the Resident Council and the CBO to
own and manage Kukui Towers. Adjust the plan of action accordingly and close by September 30,

If you have any questions, please call me on (415) 436-8102.