HILO, Hawai'i — The Department of Hawaiian Home Lands has demolished a dozen partially built Hilo homes worth a total of more than $1 million in recent weeks because the buildings sat exposed in the rain after the developer went bankrupt, stopping all construction last year.

Lloyd Yonenaka, spokesman for the Department of Hawaiian Homes Lands, said the houses were contaminated with mold from sitting vacant and open for so long. The lessees were offered the choice of having the mold cleaned out or tearing the buildings down and starting over, and all chose to start over, he said.

Julia Ke, whose unfinished three-bedroom house was among those torn down, said she couldn't bear to watch the demolition crews work.

"I refused to go, I just didn't want to go and see it," she said. "It's just so sad."

Ke has been on the Hawaiian Homes list for more than 20 years, and was finally awarded a Kaumana lot where she was building the home with her longtime girlfriend, Laura Henderson.

"It was the happiest day of my life when we were selected, and to have this happen is just terrible," Ke said.

The couple had expected to move into the new home by late last year, but all work on the house stopped in November after builder Fredco Inc. and developer Menehune Development Co. ran into financial difficulties, and eventually went bankrupt.

Much of the structural work on Ke and Henderson's house was done, but the unfinished roof consisted of bare sheets of plywood and other lumber, and water poured in all winter. Water ponded on the floor and stayed there, the floor warped, and the unfinished roof began to sag.

Now, the lot in Kaumana has been cleared, and a new contractor is preparing to start over.

Fredco and Menehune are both owned by Big Island developer Fred Yamashiro, who has filed for personal bankruptcy. Yonenaka said he does not know how much the collapse of the two companies has cost Hawaiian Homes, but acknowledged the dozen Kaumana homes alone were worth more than $1 million in materials and labor.

Hawaiian Homes is suing O'ahu construction bonding company Hardware Hawaii, alleging the company was responsible for completing 79 homes for Native Hawaiians on three islands in the event Fredco and Menehune failed. Hardware Hawaii notified Hawaiian Homes on Feb. 22 it did not have the money to complete the homes, according to the lawsuit.

Yonenaka said it was urgent that construction resume on the Kaumana homes after the bankruptcy so the units would not be further damaged by the weather, but said delays by Hardware Hawaii made that impossible. The state will try to recoup losses from the bonding company, he said.

"While there is money that is being expended, the final amount will depend obviously in great part on our litigation with Hardware Hawaii," he said.

Yonenaka said the department expects the demolition of the 12 unfinished homes will cost about $300,000. Six of the homes were more than half finished, and the other six were 15 to 20 percent finished, he said.

A PROMISE TO LESSEES

Hawaiian Homes Commission Chairman Micah Kane has said the agency has an obligation to the lessees because Hawaiian Homes required the lessees to use Fredco as their contractor in an effort to create economies of scale for the development of the homes on scattered lots on Kaua'i, Lana'i and the Big Island.

Yamashiro's companies were supposed to develop 133 houses, including 79 bonded by Hardware Hawaii.

Kane has pledged to make sure the bonded homes are properly completed for the original prices the lessees agreed to in their contracts with Fredco, which had base prices ranging from $160,000 to $260,000.

To make that happen, Hawaiian Homes has taken some extraordinary steps, including providing a total of about $100,000 in cash assistance to lessees on the three islands who encountered financing hardships because they were forced to pay extra costs when completion of their homes was delayed.

Later the department approached the lessees' banks and bought 43 construction loans on the bonded units for $4.38 million so the lessees would not have to make mortgage payments while they waited for their homes to be finished. The department plans to shift those loans back to private banks later.

Henderson said Hawaiian Homes also repaid Ke for the interest she paid on the construction loan on the unfinished Kaumana house that was torn down.

Now, the department has pledged to rebuild the demolished houses for the same prices the lessees originally agreed to pay, which for Ke and Henderson was about $170,000.

"I think they're doing everything possible to make it pono for everyone," Henderson said. "I think that's the right thing, because I don't think any of us can take much more."