HILO, Hawai'i — Growing financial pressures on the only homeless shelter operator on the Big Island have killed its ambitious plans to convert a 54-room downtown Hilo hotel into transitional housing for the homeless.

The East Hawai'i Coalition for the Homeless is losing the former Hilo Hotel site in a foreclosure auction. The coalition was unable to arrange permanent financing for the hotel it bought in 2001, or to find money to renovate rooms to begin housing the homeless there.

People familiar with the homelessness problem on the Big Island said the loss of the Hilo hotel site is a major setback because transitional housing is badly needed, and rents are going up.

"We were really hoping that would solve, not all of our problems, but a lot of our problems," said Carol Ignacio, executive director of the Big Island branch of the Office for Social Ministry for the Roman Catholic Diocese of Honolulu.

Beverley Grogan, branch director of the Mental Health Association in Hawai'i County, estimated there are 2,500 homeless on the Big Island at any one time, more than half of whom are believed to have serious mental health problems.

"The need is enormous, of course," Grogan said. As for the Hilo Hotel plan, "the location was ideal, and it was a very creative idea."

Grogan called the coalition's effort to launch a major new housing project from the hotel site a "brave" attempt, and said she believes the state, county or federal government should have stepped in to bail out the project or to help arrange permanent financing.

"There should have been a public understanding of the need, and the need for financial backup," she said. Instead, Grogan said, there seemed to be "a kind of indifference, until it got too late."

By the time the hotel foreclosed, the coalition owed $57,000 in overdue water, sewer and electric bills on the property, and owed $35,000 in back property taxes, according to foreclosure records.

The federal government also had filed two federal tax liens against the hotel in an effort to collect $67,000 in back taxes from the coalition, according to court records.

Now, the state Housing and Community Development Corp. of Hawai'i is warning it will cut off the stipend it pays to the East Hawai'i Coalition for the Homeless unless the coalition files independent audits detailing its finances and spending, an accounting requirement the coalition hasn't met for the past three years.

Steve Bader, executive director of the coalition, predicted the nonprofit will work through those problems and continue to house homeless clients at its 52-bed shelter on another site and at 21 other transitional housing units.

He said arrangements have been made to produce two annual audits by the end of this year, which he said should calm the state's concerns.

Bader said he expects the Hilo Hotel foreclosure will actually help the coalition with its financial struggles because a number of investment groups are interested in the property. If aggressive bidding at the Nov. 23 foreclosure auction pushes the price up, the nonprofit is entitled to money left over after the bills are paid, he said.

"The thing with the hotel is, at least it has equity," Bader said. He said increases in funding this year by the state and the county, combined with private fundraising efforts, will allow the coalition to keep delivering services. The coalition operates on a budget of about $600,000 a year.

"Our continued survival is really a testament to the community's support," he said.

The coalition operates the Kihei Pua Emergency Shelter and Transitional Program, the Hale O Puna facility in Puna, and has been renting out commercial space at the Hilo hotel site, which was renamed Kalakaua Place. The coalition is losing that rental income in the foreclosure.

More than half of the 600 homeless people the coalition housed last year were children, and the agency also reported it distributed 130,000 packages of food through a food pantry in Puna, according to coalition publications.

Federal policy now emphasizes getting the homeless off the streets as quickly as possible, and then dealing with their substance abuse, mental health or other problems once they are placed in safe housing, Ignacio said.

But people with those problems can be difficult tenants, and it isn't easy to find privately owned housing for them, she said. To solve that problem, the Office for Social Ministry set up a 24-hour service to respond to calls from landlords who provide that housing for the homeless, she said.

If the Hilo Hotel site had been operated as transitional housing by the East Hawai'i Coalition for the Homeless, "we would have a landlord that we wouldn't need to persuade," Ignacio said. The site is also close to services in Hilo but somewhat removed from the downtown business district, she said.

"We're so saddened that it didn't work out, because I think we would see much faster success and better outcomes in the homeless population if we had this resource," she said.

Bader said a bill to provide $500,000 in state money to renovate the hotel died at the Legislature last year, and a federal grant for $400,000 for the hotel project had to be returned because it came with restrictions on the use of the property that were unacceptable to the former owners, who had financed the sale to the coalition.

The coalition has been underfunded for years, Bader said, but rather than cut services, it struggled to make ends meet, and found itself fundraising almost constantly. Insurance and other costs increased, and state support was cut for a time, he said. That left no extra money to pump into the hotel conversion.

Sandra Miyoshi, homeless programs administrator for HCDCH, said if the coalition can't produce audited financial statements, HCDCH will halt state funding before the end of this fiscal year.

"We would have to cancel the contract for cause," she said. "We cannot continue as we are."

Miyoshi said her agency has already begun discussions with county and other Big Island non-profit agencies to try to find other ways to deliver shelter and other services to the homeless if the coalition fails. She said HCDCH doesn't want to interrupt services to the homeless.

County Housing Administrator Ed Taira said his agency also is checking into the coalition's operations and finances because of concerns it may be financially shaky. The county owns the Kapi'olani Street building that the coalition operates as the island's only emergency shelter for the homeless.

"I have every reason to believe we'll get through it," Bader said. "We've come through a very tough stretch this last three years."

Reach Kevin Dayton at kdayton@honoluluadvertiser.com.