The Clarence Ching Foundation, a major donor to Catholic charities in Hawai'i, paid more than $600,000 last year to lawyers and a public-relations firm to win support from lawmakers and regulatory approval for selling the Kukui Gardens housing complex in Chinatown to a California real-estate investor.

The payments were about one-seventh of the Ching Foundation's $4.2 million in assets and more than three times the amount that the tax-exempt foundation has given to local charities during the past four years.

The Ching Foundation has no ownership stake in Kukui Gardens but stands to receive the proceeds from the sale of the complex.

A foundation representative said the payments were an investment in its financial future.

However, the expenditure has raised concerns about whether the foundation was authorized to use the money for promoting the sale and whether it was consistent with the foundation's mission.

The U.S. Department of Housing and Urban Development, which oversees the Kukui Gardens project; and the state Attorney General's office, which regulates nonprofit organizations in Hawai'i, asked the foundation to turn over records on its legal, lobbying and public-relations efforts.

HUD wants to know why the $600,000 was spent without its approval, and the Attorney General's office is looking into whether the expenditures violate the Ching Foundation's charter and bylaws, which explicitly prohibit the use of foundation money on Kukui Gardens, whether it be for legal expenses, lobbying or any other operating costs for the apartments.

Ching Foundation attorney Bert Kobayashi would not comment. But in recent court papers, Harmon Brown, a Chicago-based attorney hired by the foundation, said the expenditures are allowed since proceeds from the sale of Kukui Gardens will be used to further the Ching Foundation's charitable mission.

Brown, who characterized the legal and public relations expenses as "necessary and reasonable" closing costs for the sale of Kukui Gardens, said payments should be treated like an investment that would generate future income.

In its court papers, the Ching Foundation also cited a letter from its accountants, Sonoda & Isara LLP, which concluded the foundation's level of giving is appropriate and the foundation's tax-exempt status is not in jeopardy.

"We conclude that the expenditure by the foundation of funds to cover the closing costs of the complex should constitute permissible expenditures ... provided that the foundation is reasonably assured that the proceeds of such sale will be distributed to the foundation," Brown wrote.

The disparity between the $600,000 and its charitable givings could invite the scrutiny of the Internal Revenue Service, according to one expert in nonprofit law. Under federal law, private foundations are required to give an average of 5 percent of their assets. But when their administrative expenses such as legal fees exceed those charitable givings, it raises red flags with the IRS, said Mark Kramer founder of Massachusetts-based FSG Social Impact Advisors and a senior fellow at Harvard University's Kennedy School of Government.

"If the IRS were to look at this, they would probably penalize the foundation," Kramer said.

Tenants, like Tammy Stancil, questioned why a nonprofit foundation could spend that much money to further a deal.

"How come they can spend that kind of money to sell Kukui Gardens and not spend any money on fixing it up?" said Stancil, who has lived in Kukui Gardens for 19 years. "It makes me so angry."

CHARITABLE DONATIONS

Established in 1967, the Ching Foundation has contributed millions of dollars to Catholic organizations such as Saint Louis School, Chaminade University and Saint Francis Healthcare Systems of Hawaii.

The foundation was initially funded by donations from local developer Clarence T.C. Ching, who died in 1985. The foundation's annual gifts are now financed by income from investments, which typically ranges between $170,000 and $800,000 a year. But in 2005, the foundation posted a loss of $434,829 largely because of its investment in a high-risk junk bond fund.

Kukui Gardens, which was developed by Clarence Ching in 1970, is one of the state's largest affordable-rental projects with 857 units and about 2,500 residents. Ching set up Kukui Gardens Corp. to operate the project but specified proceeds from its eventual sale would go to his foundation.

Kukui Gardens Corp. said in January 2006 that it needed to sell the complex because it couldn't afford to make repairs that would cost as much as $12 million. Last July, one of the Kukui Gardens buildings suffered extensive damage when chunks of masonry and a 3-foot rebar collapsed.

News of the sale alarmed tenants and community leaders, who believed a new owner would tear it down and build more expensive housing that will displace hundreds of low-income tenants.

In April 2006, Kukui Gardens Corp. said it planned to sell the apartment complex to San Francisco-based Carmel Partners. Carmel's original plans called the demolition of the complex to make way for 3,700 residential units and 235,000 square feet of retail and office space.

An uproar over the potential loss of affordable housing prompted the state Legislature to pass a bill calling for the use of eminent domain powers to acquire the buildings. The bill was signed into law by Gov. Linda Lingle on July 7.

Meanwhile, Carmel Partners reached a compromise with tenants that would preserve as many as 800 units for affordable housing. The compromise is contingent on $55 million in state financing.

Earlier this month, House Speaker Calvin Say promised Kukui Gardens residents that the Legislature would follow through on the plan to acquire ownership of Kukui Gardens for the state.

WHAT RECORDS REVEAL

Details of the Ching Foundation's expenditures to promote the sale of the apartments to Carmel Partners were included in hundreds of pages of internal memos, e-mails and legal bills filed with the state Probate Court during the past several months.

Former Ching Foundation board member Wallace Ching has sued fellow trustees, including his brother Lawrence Ching, alleging that they mismanaged the trust. He said he was ousted as a trustee after he opposed the sale of Kukui Gardens.

Records produced in the trust litigation show that the bulk of the payments made by the Clarence Ching Foundation — a single check for $528,926.13 — went to the Kobayashi, Sugita & Goda law firm on Dec. 20, while the foundation paid $76,661.59 for work by the public-relations firm of McNeil Wilson Communications Inc.

Those documents show that the two firms were hired to conduct legal and public relations work for the foundation but that their partners made extensive contacts with politicians and federal and local officials.

A chunk of the $600,000 was used for first-class travel and $300-a-night lodgings at the Hotel Monaco in Washington, D.C., in June 2006 for attorney Alan Goda, his partner Janeen-Ann Olds, McNeil Wilson partner David Wilson and real-estate consultants Scott Gomes and Steve Gilley.

According to the court records, Goda charged $325 an hour and his billings included up to 11 hours of work that he conducted on a return flight from Washington to Honolulu. Olds charged $225 an hour while partners in the McNeil Wilson firm billed at a $250 an hour rate.

During the June trip to Washington, the foundation's consultants met with U.S. Sen. Daniel K. Inouye, U.S. Rep. Neil Abercrombie and an official in Sen. Daniel Akaka's office, according to internal Ching Foundation memos. They also met with the foundation's Washington-based lobbyists and lawyers, Tim Aluise and Lou Gimmelbein.

According to a June 17, 2006, memo from attorney Olds, the Ching Foundation had asked Inouye, Abercrombie and Akaka for a formal letter of support to HUD. All three declined but said they would monitor the situation, the memo said.

According to Olds in the memo, Inouye "thought Congressman Abercrombie and Senator Akaka did not support the sale of the project" and that Inouye was committed to supporting Abercrombie and Akaka because "they are up (for re-election) this year, not him."

Olds did not return telephone calls for comment.

Jennifer Sabas, chief of staff for Inouye's Hawai'i office, said Inouye agreed to meet with Kukui Gardens representatives to facilitate a resolution in the matter. But she said Inouye declined to take a position since the issue was more of a state issue than a federal one.

Wallace Ching alleged in his lawsuit that the work conducted by the Kobayashi firm and McNeil Wilson constituted lobbying and that the foundation did not register those lobbying efforts with appropriate federal, state and city agencies.

The foundation said none of the legal and public relations work comes under the legal definition of lobbying because they did not attempt to influence legislation. For that reason, none of Kukui Gardens' consultants were required to file lobbying disclosures with appropriate federal, state and city agencies, the foundation said.

Under federal tax law, a private foundation is allowed to engage in lobbying so long as it does not devote a substantial part of its activities to lobbying. A nonprofit organization also can conduct self-defense lobbying against legislation that could affect a charity's existence or tax-exempt status.

In sworn declarations filed in the Probate Court case, Wilson, Olds and real estate executives Gomes and Gilley denied they lobbied on behalf of the Ching Foundation but gave a description of their contacts with lawmakers.

Aluise, who said he was hired by the Kobayashi Sugita firm to advise them on HUD rules and regulations, said that he met with congressional leaders and provided draft legislation to Abercrombie and staffers for Inouye and Akaka at their request. But Aluise denied that any lobbying had been conducted.

"The purpose of these meetings was not to influence legislation (there was no legislation and none had been proposed) but to seek support for the prepayment of the loan and the sale of the project," Aluise said.

Reach Rick Daysog at rdaysog@honoluluadvertiser.com.