The financial woes of a Big Island developer who may be on the verge of bankruptcy has halted work on dozens of homes being built for the state Department of Hawaiian Home Lands on three islands.

Fred T. Yamashiro, president of Fredco Inc., said he mistakenly underbid the projects several years ago, and has told Hawaiian Homes officials his company won't be able to complete work on 132 lots at various stages of development on the Big Island, Kaua'i and Lana'i.

News of Fredco's financial problems alarmed and angered homesteaders, including some who have borrowed hundreds of thousands of dollars and delivered money to Fredco to have their homes built. Those borrowers are still required to make payments on the mortgages, but can't move into their homes because they aren't finished.

"Everyone is disappointed, because they're working two or three jobs to pay both a mortgage and rent, and still have no home," said Joe Lee Hong, whose four-bedroom house stands unfinished in a Hawaiian Homes subdivision in Kaumana on the Big Island. "These are good people, hard working people."

After many months of construction delays, Lee Hong said, the work crew at his house finally walked off the job last week, telling him they were leaving because they weren't being paid. Lee Hong estimated his house is still one to two months away from completion.

"We've been put through an emotional roller coaster the whole time, and now we sit with debt, and no home," he said.

Hawaiian Homes Commission Chairman Micah Kane said responsibility for completing construction now falls to bonding company Hardware Hawai'i, but Kane said Hawaiian Homes will be "engaged" in solving the problem because it was Hawaiian Homes that selected Fredco to develop the projects.

Laura Henderson, a sergeant with the state Department of Public Safety, stood outside her unfinished Kaumana home pointing out the bare plywood on her roof that is beginning to crack and sag in the Hilo rain. Water from the leaking roof had ponded on the wood floor of the home.

"This our dream, we waited, and now look at it," said Henderson. Henderson is building the home with her longtime partner Julia Ke, who is Hawaiian.

'I UNDERBID'

Fredco was the developer for a dozen Hawaiian Homes units on Lana'i, and another 29 on Kaua'i. On the Big Island, the company was developer for 37 homes in Kaumana, another 17 in Pana'ewa, and 37 in Lalamilo in West Hawai'i.

The homesteaders acknowledge the homes were very inexpensive by Hawai'i standards, with Lee Hong paying about $200,000 for a four-bedroom house with a fireplace, and Henderson and her partner paying $160,000 for a three-bedroom.

Yamashiro said Friday he ran into problems because he bid the project two or three years ago at $125 per square foot, and increases in construction materials and labor costs have pushed his costs to $165 per square foot today.

"Simple math, I'm over budget $40 a square foot," he said. "That's it in a nutshell. It's like I tell my wife, in our business, if we get a good project, we make a lot of money, but you can lose a lot of money.

"I underbid, and I take full responsibility," he said.

Hawaiian Homes is the largest developer of affordable homes in the state today, with about 2,000 units in the planning stages or various phases of development, Kane said. The department uses income from its commercial and other leases to finance housing development on other HHL lands. It then leases housing plots to Native Hawaiians for 99-year terms and they build homes on the land.

The agency has also been receiving $30 million a year in payments from state government under a settlement to compensate HHL for historic uses of Hawaiian Home Lands by the state and territorial governments. Those payments have allowed HHL to dramatically accelerate its home building program.

BONDING COMPANY

Kane said the department selected Fredco because Yamashiro's Menehune Development Co. had a good track record with the department dating back to 1998, building more than 250 homes in Kona and on O'ahu.

Yamashiro is well known on the Big Island and served for years on the Big Island Water Board after he was appointed by former Mayor Stephen Yamashiro, who is no relation. Fred Yamashiro is currently a member of the county Liquor Commission appointed by Big Island Mayor Harry Kim.

Kane said all of the projects have already been delayed to varying degrees, with Kaumana already delayed by a year. The projects are again stalled while the problem with Fredco is sorted out, but Kane said he expects to see movement soon.

"The bonding company is engaging. They are in discussion with the beneficiaries. The responsibility now falls on the bonding company to complete the projects, and we're going to assure that that happens," Kane said.

Technically the homesteaders have contracts with Fredco, and the bonding company is now required to fulfill those contracts, but Kane said the Department of Hawaiian Homelands will be involved.

"We're going to fulfill our obligations," Kane said. "We put our stamp of approval that this contractor was going to fulfill his obligations, and so I think we have a moral obligation to our families, and we're not going to sidestep that in any way shape or form."

He said one of the challenges has been to determine how the department can help speed progress on the homebuilding without releasing any of the players from their financial obligations to the homesteaders.

LEGAL ACTION FEARED

Henderson and Lee Hong both said they have been trying to reach Hardware Hawaii to find out when work can resume, but said they have received no response apart from a letter asking for records. The letter from Hardware Hawaii advised the lessees that "Fredco has yet to provide access to records" for the project.

Representatives of Hardware Hawai'i on the Big Island referred questions to a company official on O'ahu who did not return calls Friday.

Alan Murakami, litigation director for the Native Hawaiian Legal Corp., said inquiries have been trickling in from homesteaders caught up in the Fredco collapse, and said the staff is concerned there may be an "onslaught" of demand for legal services by lessees.

In one case, a homesteader at Kekaha was originally given a completion date of 2005 for a house, which was later moved to 2006. The developer took a draw of $37,000 to finance work on the house, but has only completed the foundation. The lessee, meanwhile, gave up a rental unit because he thought he would have his own home by now.

Murakami questioned the HHL strategy that required homesteaders to use a contractor such as Fredco that was selected by HHL, while at the same time HHL set up legal arrangements where the contracts to build the homes are all between the homesteaders and Fredco.

That placed the greatest risks on the lessees when it is the Department of Hawaiian Home Lands that has a public trust obligation to the homesteaders, Murakami said.

"There is something very questionable about that," Murakami said, adding that the department needs to be "accountable" for the arrangement.

Kane said that arrangement has worked in the past, "but in this case it obviously didn't." In hindsight, it would have been best if the developer of these projects had been legally bound to the department instead of the lessees, he said.

"I want to make sure that people don't feel that we're trying to skate on our responsibility," he said. "We're going to see it through."

Kane said the project delays prompted Hawaiian Homes to take a closer look at Fredco about four months ago, and on Nov. 26 the company notified Hawaiian Homes that workers would be pulled off the projects. Kane said he interpreted that to mean Fredco did not have the money to pay for those crews.

FEE HIKE DENIED

Kane said Fredco recently asked for permission to charge more for the homes, but Hawaiian Homes refused that request.

On Nov. 30 the company notified the bonding company that it would not be able to complete the projects. "We have met with Fredco. He was trying to make it work, and I think it just kind of snowballed on him," Kane said.

Hawaiian Homes has had meetings of homesteaders to explain what is happening, and Lee Hong said many were angry.

Henderson said she is stuck paying both her mortgage for her home in Glenwood, which she plans to sell to move to Hilo, and for the unfinished house in Kaumana. "This is wrong," she said. "This has been a nightmare."

Lee Hong asked early in the process if he could select his own contractor, and Hawaiian Homes told him he had to use Fredco. That means Hawaiian Homes now has a responsibility to make sure the projects are promptly finished even if the legal contracts are technically between Fredco and the homesteaders, he said.

"Given the opportunity, I would have had a home built a year ago, I would have been living in it a year ago," Lee Hong said. "The people are not asking for anything but to get what they paid for."

Reach Kevin Dayton at kdayton@honoluluadvertiser.com.