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Potential kickbacks, conflicts of interest and mismanagement of federal grant funds mean the city of Honolulu will have to pay back nearly $8 million it gave to an embattled nonprofit in Central Oahu that serves the elderly and developmentally disabled adults.

On Monday, the U.S. Department of Housing and Urban Development delivered a 15-page report to Honolulu Mayor Kirk Caldwell that not only outlines possible illegalities, but also raises troubling questions about how effectively the city oversees major federal grants.

The report is the culmination of a multi-year HUD probe into ORI Anuenue Hale, which received more than $8 million in federal Community Development Block Grant money to buy and develop 30 acres of land in the pineapple fields adjacent to the .

HUD’s report finds that city officials allowed ORI to sidestep federal rules, and that little was done to ensure the nonprofit complied with those requirements even though the investigation has been going on for several years.

“ORI has maintained significant support over many years by the direct involvement of high ranking City and State officials regarding ORI’s projects,” the HUD report says. “The direct involvement of the officials’ appears to have placed pressure on staff resulting in the City ignoring regulatory violations in favor of completing the project and satisfying ORI’s requests.”

Caldwell’s spokesman, Jesse Broder Van Dyke, said the city will look into HUD’s findings on ORI and the concerns of mismanagement of federal dollars.

“We take the allegations seriously and are in the process of reviewing the details,” Broder Van Dyke said in an email. “The city will be conducting an internal audit to review the allegations.”

Most of the federal money was used to build facilities at the ORI property, including the Aloha Gardens Wellness Center and Camp Pineapple 808, a group of cabins that under CDBG rules must serve a specific disadvantaged population, such as abused children, battered spouses, the elderly or disabled adults.

But just last month, HUD found that ORI was marketing these cabins to the general public for weddings, parties, banquets, fundraisers and corporate retreats.

HUD said ORI advertised these services on its and that city officials probably should have raised questions about the marketing campaign during their regular CDBG compliance reviews.

The fact that they didn’t supported the agency’s finding that the city would not enforce CDBG rules or take action when it found violations.

In all, HUD found eight areas of major concern in which ORI or the city violated federal CDBG rules and potentially broke the law.

Those include:

• The city authorized $7.9 million in CDBG funds to develop ORI’s Aloha Gardens and Camp Pineapple 808 project yet didn’t vigorously track how or where the money was spent. HUD found that this didn’t allow for proper accountability and raised the likelihood that there were duplicate or overlapping payments. In one instance, a $923,589 payment included $85,000 in administrative fees charged by a contractor and $275 for “vegetation control” for a private property near Pearl Harbor.

• A three-acre parking lot next to ORI’s property was acquired and built despite the fact that it would be considered illegal under the city’s land use laws. By ignoring the law, the city and ORI spent $597,780 in CDBG funds improperly.

• The city paid eight times more than the fair-market value for the three-acre parcel that was used for a parking lot. HUD said this was due to the city ignoring its own land-use laws, which skewed the appraiser’s valuation of the property. A similarly sized lot that was zoned properly was adjacent to the site.

• The city also gave the nonprofit $226,680 that was used for expenses that didn’t appear to fall under CDBG eligibility requirements. Some of those expenses included $6,000 for grant research and $22,000 for vehicle leases and auto insurance. HUD found the city didn’t review ORI’s proposed budget for the federal money.

• The city loaned ORI nearly $1.2 million in CDBG funds between 1989 and 1995 to build facilities to help people with physical and mental disabilities. In 2010, the city decided to forgive these loans. HUD found that this decision was made by city employees who were running for elected office while receiving campaign donations from ORI representatives. HUD didn’t name the candidates, but said the financial relationship created a conflict of interest situation. Forgiving the loans also raised concerns about favoritism and access to federal funds.

• In 2004, ORI wrote a letter documenting that it had negotiated a $90,000 payment from a contractor in exchange for a $5.3 million CDBG contract. HUD said that despite this being a possible violation of “anti-kickback” rules the city didn’t take action until seven years later when HUD notified the budget department.

• The city either lost or withheld much of the documentation related to ORI’s Aloha Garden project, citing attorney-client privilege, a direct violation of CDBG rules. When HUD put more pressure on the city to find the missing documentation, officials discovered several boxes in a storage complex. Despite more files there were still several years’ worth of missing information. HUD said this “raises concerns about the integrity of the City’s ORI records and the City’s overall recordkeeping system.”

The federal housing agency says the city must repay the $7.9 million to the community block grant program and cancel the Aloha Gardens activities. The money would then be available for use in other federal grant programs.

That would further pinch the city’s already tight budget this coming fiscal year. The Honolulu City Council, which is debating whether to spend millions on earmarks for other nonprofits around the island, is expected to vote on the budget on Wednesday.

HUD also said the city needs to immediately resume collection of the $1.2 million in loans given to ORI including interest, until it makes public its plan to forgive the loans. The public must also be informed of any conflicts of interest involving ORI and city officials, HUD said.

The city also needs to “ensure proper authorities are reviewing the possible kickback situation,” HUD said.

While HUD lays out several scenarios in which city officials broke their own rules or gave preferential treatment to ORI, the federal agency doesn’t name names.

Mark Chandler, who is the Director of Community Planning and Development in HUD’s Honolulu field office, did not return a phone call seeking comment Monday.

City politicians who have been linked to ORI in the past include former Mayor Mufi Hannemann and Honolulu City Council Chair Ernie Martin. Both were running for office in 2010 when the $1.2 million loan was forgiven, with Hannemann aiming for the governor’s office and Martin running for his current council seat.

ORI employees, including founder Susanna Cheung, have given more than $10,000 dollars to Hannemann’s campaigns between 2007 and 2010, according to Hawaii Campaign Spending Commission data.

Martin’s campaign has received $4,200 from Cheung since 2009, with her most recent donation of $1,000 coming May 2, 2012. Prior to getting his election in 2010, Martin was the acting director of the city’s Community Services Department, which oversaw the CDBG grants.

Cheung is an active political donor. In addition to Hannemann and Martin, she has given money to Caldwell, City Councilwoman Ann Kobayashi, former Councilman Romy Cachola, Hawaii Sen. Donovan Dela Cruz, former Lt. Gov. James “Duke” Aiona, and U.S. Rep. Colleen Hanabusa.

Attempts to reach Cheung and Martin on Monday were unsuccessful.

Read HUD’s report here: