A Hawai'i real estate development company plans to demolish one of Kailua's biggest collections of affordable rental apartments and replace them with mid-priced, for-sale condominiums.

The local Schuler Division of Texas-based homebuilder D.R. Horton said the redevelopment is necessary to comply with a federal prohibition on multi-family cesspools, like those for the 50-year-old buildings.

About 217 units, most of them rentals, in roughly a dozen two-story walkups are slated to be demolished in about two years. They are across Kailua Road from Kailua District Park.

The timing of the project couldn't be worse for many low-income residents facing soaring rents and incredible competition for a tight inventory of inexpensive units on O'ahu.

Some tenants in the buildings — which include Kailua Palms, Coral Apartments, Kailua Arms and Countryside Apartments — are fearful that they won't be able to find replacement rentals.

"I don't know what I'm going to do," said Sara Way, a 57-year-old resident in the Kailuan who retired as a special-education teacher in 1990 because of a disability. "I'm scared. I might have to go in a group home, or figure out a way to live with friends. I don't know."

Castle Family LLC, a subsidiary of Kaneohe Ranch Co. that owns the 6.5 acres under the buildings, said it has sold the property to Schuler for an undisclosed price estimated to be more than $12 million.

Schuler plans to replace the buildings with about 160 to 180 condominiums starting in mid-2008.

Mike Jones, Schuler president, said environmental cleanup and sewer upgrade costs make it necessary to build units that can be sold for higher prices.

"It's not going to be super high-end, and it's not going to be within the city and county guidelines for affordable housing," Jones said.

Predicting unit sale prices would be premature, he said. According to the Honolulu Board of Realtors, the median price for condos sold in Kailua during the fourth quarter of last year was $406,400, meaning half sold for more and half for less.

According to Schuler, units must be vacated by September 2007 under a mandate from the Environmental Protection Agen-cy, which last year outlawed large-capacity cesspools.

A new report by a Legislative Housing and Homeless Task Force projects a need for 15,590 low-income household units on O'ahu by 2009.

The task force recommends the state and private developers try to build 10,000 to 15,000 affordable units within five years.

One renter in the group of Kailua Road apartments to be demolished said he pays $700 a month for a two-bedroom unit — about half the going rate for similar size housing in the area.

Way, the retired teacher, owns her leasehold unit but will lose the property when her lease on the land expires next year. Also, she said, she has suffered financial difficulty because of an $11,000 penalty for keeping the cesspool open.

Way said the fine is worked into her monthly maintenance fee, which she said is about $670. She and other residents in her building also can no longer use their washing machines under the EPA mandate.

"It doesn't feel fair," she said. "(The EPA) wanted us to build a septic tank. We said that's ridiculous for us to upgrade our property that much when it's slated to be torn down so soon."

When the leases expire next year, Schuler will assume ownership of the buildings that some consider ripe for replacement.

"The buildings are pretty old and tired," said Kimo Steinwascher, development and leasing vice president for Kaneohe Ranch.

Mitch D'Olier, Kaneohe Ranch chief executive officer, said Schuler competed with other developers to buy the property. "We are confident that Schuler's integrity and high-quality workmanship will meet the needs of the community in keeping Kailua 'Kailua,'" he said.

Jones said redevelopment plans are in a preliminary stage, and will be shared with the community when details come into focus.

"As a D.R. Horton employee and a longtime Kailua resident, I know Kailua is a special place," he said. "We are deeply committed to ensuring our new development supports the unique character of the community."

The building height limit for the property is 40 feet, which would allow four-story buildings that Jones said probably would use the ground floor for parking.

Reach Andrew Gomes at agomes@honoluluadvertiser.com.