More than 500 homes in Kalaeloa built for military rental housing may one day be sold as condominiums under a conversion process that would be a first in Hawaii.

The company that bought the homes five years ago, Carmel Partners, said it may never sell the rental residences as condos, but it has laid the groundwork for a condo conversion as an option.

Others familiar with the project believe Carmel has long maintained an interest to sell the homes as condos but that the housing market slump that emerged in 2008 made such a move unattractive at least for now.

San Francisco-based Carmel bought 520 mostly townhomes in three neighborhoods called Orion Housing, Orion Park and Makai Housing in 2005 from a private partnership that acquired the homes and other real estate at the former Barbers Point Naval Air Station from the Navy in 2003.

The average price Carmel paid was $152,885 per home on the base area now known as Kalaeloa.

Carmel has renovated most units, which are rented to military and nonmilitary tenants. Renovations are slated to be completed on the last 60 homes early next year.

In August, Carmel registered the 284 Makai homes as condo units by filing a report with the state Real Estate Commission. The report defines the units and discloses other important information to potential buyers. The filing followed similar reports Carmel registered with the commission in 2006 for the 116 Orion homes and 120 Orion Park homes.

Frank Striegl, Carmel’s vice president of asset management, said there is no present effort or plan to sell the Kalaeloa homes as condos, adding that the project is doing well as rentals with an occupancy rate in the low 90 percent range.

Striegl said Carmel registered the project with the commission as a condo conversion to diversify its investment exit options beyond selling the homes in bulk to another rental operator.

"We may never retail it off," he said. "It’s a successful rental project."

Affordable housing advocates often have concerns about affordable rentals being removed from inventory for condo conversion, though such conversions typically add to the inventory of affordable homes for sale.

Dividing the Kalaeloa rental property into condo units adds value to the project because of the potential for Carmel or a future owner to sell the homes as condos for considerably more than can be obtained by selling the property as a rental project.

Local developer Peter Savio, who has converted numerous rental apartment projects in Hawaii for sale as condos and bid on buying the Kalaeloa homes with the intent of converting them to condos, said a condo conversion would maximize Carmel’s return on its investment.

"Their exit strategy is not going to be selling it to another rental operator," Savio said. "In Hawaii our real estate is expensive and our rents are low. They bought the property for the purpose of selling it as condominiums, then the market collapsed."

Even if Carmel ends up not selling the Kalaeloa homes as condos, filing condo conversion reports with the Real Estate Commission increases the value of the property should Carmel decide to sell the rental complex to another buyer.

If Carmel or another developer proceeds with condo sales, it would be a unique conversion in Hawaii — perhaps the first instance of military housing being converted for sale as condos and becoming subject to local government design and permitting rules.

Converting former military housing for sale presents unique challenges and uncertainties because the federal government built the homes to its own standards that in some areas don’t comply with county building codes. There also is an absence of construction and engineering documents that means some things about the project — including its susceptibility to flooding and existence of potentially hazardous building materials — are unknown, according to Carmel’s condo report.

The Makai homes were built in 1973, followed by the Orion and Orion Park homes in 1994.

When the military sold the property, the zoning of the land automatically changed from a federal designation to general preservation, not residential. The city Department of Planning and Permitting granted a zoning variance for the project as a nonconforming use on preservation land. However, the city agency can’t determine whether the homes qualify as a legal nonconforming use because of a lack of documentation about the property, according to Carmel’s report.

According to studies of the property commissioned by Carmel from engineering and architectural firms, the homes are generally in good condition and feature more spacious layouts and yards than most townhouse subdivisions in Hawaii.

But certain elements don’t comply with city building codes, including guardrails that are spaced too far apart and lanai sliding doors not made with safety glass. Other elements that may need upgrading to comply with county codes include fire alarms and some electrical outlets, according to an assessment by Ernest M. Umemoto AIA Architect Inc.

Specialty testing for lead paint and asbestos wasn’t conducted, though no obvious signs of such harmful material were observed by the Umemoto survey.

If the Kalaeloa housing were sold as condos and became subject to city permitting standards, the Umemoto report said it would be a test case for how the city processed permits for upgrades or repairs.

However, the state’s Hawaii Community Development Authority is assuming zoning and planning authority over the former Barbers Point Naval base and intends to apply urban zoning to the former military housing as early as January. The designation would eliminate the issue about the homes being nonconforming.

Another unusual feature of the Kalaeloa homes is that electricity, water and waste-water utilities are still controlled by the Navy. However the HCDA is exploring possibilities for having traditional utility operators take over the services.

Future changes to zoning and utility operations can be updated in Carmel’s condo reports, which generally are good for about a year but can be extended annually with or without changes.