California sues LA developer for bungling homeless housing projects

California’s attorney general has filed a lawsuit against a Los Angeles developer that defaulted on millions of dollars of loans under a state-run program to house the homeless in converted motels from San Bernardino to the Bay Area.

In the 321-page lawsuit filed Monday, Jan. 8, in Los Angeles Superior Court, Attorney General Rob Bonta alleges Shangri-La Industries and other named defendants — including San Bernardino County and the cities of Redlands and Thousand Oaks — “breached their obligations” under terms of their agreements with California’s Homekey program.

Also named as a defendant is Step Up on Second, the Santa Monica-based nonprofit that partnered with Shangri-La to provide services to the homeless and to serve as the property manager at the seven converted motels. More than half a dozen third-party lenders Shangri-La tapped to secure loans for the motel projects also are named in the lawsuit.

“The state is taking legal action as Shangri-La has misrepresented multiple financial considerations and has yet to cure a number of breached contractual obligations to the state and the Homekey program. The difficulties they find themselves in are of their own making,” said Pablo Espinoza, a spokesperson for the Department of Housing and Community Development, in an email.

The state first alerted Shangri-La Chief Executive Officer Andy Meyers and Chief Financial Officer Cody Holmes of their alleged contract breach in a letter dated Dec. 4.

Neither Meyers nor Holmes responded to requests for comment.

Possible remedies

The state is requesting several possible remedies through the court, including one or all of the following:

• Shangri-La and its partner local agencies return all the Homekey funding granted by the state, plus attorney fees.
• A judicial order that the defendants ensure each of the motel properties, via recorded agreements with their respective counties, be designated as homeless housing for up to 55 years.
• A receiver be appointed for each property to ensure it is run in accordance with the Homekey program.

Loan defaults

Shangri-La, according to the lawsuit, received more than $114 million in Homekey funds from the state to convert the motels into permanent supportive housing in San Bernardino, Redlands, Thousand Oaks and two Northern California communities. The developer then granted and recorded deeds of trust to secure loans from the third-party lenders without first obtaining the state’s written authorization, as required under the Homekey agreements.

Shangri-La then defaulted on the loans, causing the lenders to begin the foreclosure process.

“All seven Homekey properties in which (Shangri-La Industries) was a private grantee are at risk of imminent foreclosure,” the lawsuit states.

Additionally, the lawsuit alleges that for six of the seven motel properties, Shangri-La and its partner agencies failed, in timely fashion, to record use restrictions on the motel properties to ensure they would be used solely for interim or permanent housing for the homeless for up to 55 years.

Homekey quagmire

The Southern California News Group first reported Shangri-La’s quagmire involving its Homekey projects in May 2023, when it learned that more than $2 million in mechanics liens had been filed at the San Bernardino County Recorder’s Office by subcontractors alleging the developer failed to pay them for rehabilitation work at the former Good Nite Inn in Redlands. Shangri-La subsequently defaulted on its loan for the project, twice.

The Southern California News Group also learned that similar problems were playing out with subcontractors who did work at Homekey-funded motel-conversion projects in other cities. Among them is Adolfo Gomringer, owner of Monrovia-based AG Flooring Inc.

Gomringer recently told the Southern California News Group that Shangri-La still owes him $93,000 for work his company did at the former All Star Lodge in San Bernardino, including demolition and installation of metal framing, drywall and flooring from March 2021 through December 2022.

Though Gomringer said he checks in almost daily with the developer, he said Holmes has not responded to him since October. He said he is now saddled with $100,000 in credit card debt, much of which was accrued to cover business expenses.

San Bernardino County was awarded $8.3 million by the state on Nov. 24, 2020, for the conversion of 76 units to permanent housing for homeless people at the former All Star Lodge. It opened in March 2023.

Shell game

Gov. Gavin Newsom launched Project Homekey in June 2020 to protect unhoused individuals from the threat of the coronavirus pandemic. The state has allocated more than $3 billion to cities and counties to purchase motels, hotels, vacant apartment buildings and other properties to provide permanent housing for the homeless.

The state alleges in the lawsuit that for each of the seven motel-conversion projects, Shangri-La created a shell company, in the form of limited partnerships, using the address of each motel as the name of the limited partnership. Those limited partnerships were named in the lawsuit as the “titleholder defendants.”

“The property titleholder defendants were and remain undercapitalized and were created as shells for the sole purpose of carrying out the misconduct of (Shangri-La Industries) and Step Up,” according to the lawsuit. “Defendant Shangri-La Industries LLC, its partners and the shell businesses it controls have sought to take advantage of this program, to the detriment of the State of California and its residents, for which immediate and permanent relief is sought.”

Step Up

Step Up President and CEO Tod Lipka did not return telephone calls seeking comment. In an interview with the Southern California News Group last month, Lipka said he was shaken by the news about the financial state of the seven Homekey projects, and stressed that Shangri-La, not Step Up, was responsible for all finances and property acquisitions involving the Homekey projects.

Lipka also said Step Up, like some of the subcontractors, had not been paid by Shangri-La for services it provided for motels in  Redlands, San Bernardino and Salinas over the past two years.

How and why

It remains unclear how and why Shangri-La got itself ensnared in the predicament.

In October, Redlands spokesman Carl Baker told the Southern California News Group that Shangri-La, after being served its second default notice by lender Arixa Institutional Lending Partners, had been working with Arixa to refinance the loan and address all outstanding issues. Shangri-La owed Arixa more than $332,000 at the time.

Shangri-La first defaulted on its Arixa loan in May 2023, owing the lender $277,000 at the time. The developer staved off foreclosure by paying the debt after receiving the default notice.

San Bernardino County spokesman David Wert said in an email Tuesday that the county has not reviewed the complaint and therefore declined to comment. Baker, the Redlands spokesperson, did not immediately respond to a request for comment.