The Office of Hawaiian Affairs has been building its real estate portfolio over the past couple of decades to the point where it is now the 13th-largest landowner in Hawaii with holdings valued at more than $421 million.

A new state audit, however, has found that OHA’s approach to real estate has been “ad hoc” and “risky,” absent of a strategy and other policies necessary to help guide the agency into making wise decisions, maximizing its resources and minimizing risk to its trust assets.

“It all goes back to needing to protect the beneficiaries,” state Auditor Les Kondo said Tuesday in an interview.

OHA responded to the audit late Tuesday in a statement, saying it is “extremely disappointed” that the auditor does not acknowledge that during the audit period from 2019 to 2021, the board approved its governance and policy frameworks, providing a basis for updating all of its policies.

“The report fixates on outdated land policies yet does not acknowledge OHA’s sound due diligence business practices; nor does it acknowledge the activities that occurred between the end of the audit period and the report issuance date, a common audit practice,” the statement said.

“Finally, the State Auditor’s recommendations relating to policy and planning are being addressed as a part of already in-progress organizational work. Additional recommendations for the Board related to operational, procedural and process oriented items will also be addressed in the normal course of operations by Administration. OHA continues its commitment to be organizationally and fiscally sound and prudently stewarding trust resources, so that we better the conditions of Native Hawaiians.”

Kondo said he stands by his latest OHA audit, which is conducted at least once every four years by law, this time focusing on the agency’s growing real estate portfolio.

The agency notes that in 2007, with the agency anticipating becoming a major landowner with the imminent acquisition of 30 acres in Kakaako Makai, OHA itself recognized the need for guidelines to help steer its development of the prime oceanfront property. The board of trustees adopted a Real Estate Vision, Mission and Strategy Policy that called for creation of a real estate strategy, business plan and investment policy.

The problem, according to the audit, is that these plans and policies were not in place when OHA actually took control of the land five years later. They also didn’t exist in 2012, when OHA purchased the Gentry Pacific Design Center for $24.1 million, a shopping center now called Na Lama Kukui and home to the agency’s headquarters.

And they were still missing in 2021, the audit said, when OHA spent $47 million for its 500 N. Nimitz Highway and Iwilei Business Center properties.

Kondo said that without these “foundational components” — including the criteria to weigh potential real estate opportunities in the future — OHA’s acquisition of real estate will continue to be not only reactive, but risky.

“Forty-seven million dollars — that’s a lot to spend without that real structure in place,” he said.

In the $47 million deal, OHA trustees and administrators identified the redevelopment potential of 500 N. Nimitz Highway and Iwilei Business Center properties due to their proximity to the proposed Iwilei and Chinatown rail transit stations.

But OHA’s preliminary environmental studies also identified the likelihood of soil contamination there, recommending a more thorough evaluation before redevelopment, the audit said. Instead of finding out more about the extent of the environmental contamination and the potential cleanup costs, OHA didn’t pursue the matter.

Instead, OHA administration recommended to “mitigate” the risk by planning to do further testing in the future.

“As with other OHA land acquisitions, there is no clear, board-approved direction as to how those properties fit in any real estate strategy, investment strategy, or other plan,” the audit says. “More significantly, despite its stated intent to redevelop the properties in the future, OHA appears to have little understanding of the feasibility or the potential costs to do so.”

The audit also found that OHA has made little progress in developing 30 acres in Kakaako Makai, renamed Hakuone, which the agency accepted more than a decade ago to settle $200 million in past-due ceded-land payments from the state.

Since taking control of the parcels, OHA has spent more than $6.5 million on three separate planning campaigns yet has not adopted a conceptual master plan or made any substantial improvements there.

This is partly due to changes in board and administration leadership and shifts in the agency’s direction. OHA’s desire to build housing on some of its parcels to increase land value also has been stymied, with OHA unable to successfully lobby the state Legislature to lift a prohibition on residential towers in Kakaako Makai that has been in place since 2006.

OHA trustee Keli‘i Akina said Kondo and his team did a “fairly thorough job of identifying where the glass is half empty” with respect to OHA’s management of its land assets.

“There is no question that the people of our state, both Hawaiian and non-Hawaiian, deserve to see better progress in the development of Kakaako Makai,” Akina said.

“At the same time, the state’s auditors would do well to recognize that the glass is also half full,” he said, adding that OHA has made significant progress during the past several years in overcoming a number of challenges.

The audit is released as OHA and Kondo are locked in litigation at the state’s highest court. The state Supreme Court is now weighing the arguments in a suit filed in 2020 by OHA in response to Kondo suspending his office’s last audit after trustees refused to hand over unredacted minutes of its closed- door executive sessions. The suspension resulted in the temporary withholding of $3 million in state funding to OHA.

Kondo said the lawsuit had no influence on making the current audit.