Shangri-La Industries, which converted motels into housing units, is being sued by the state for allegedly misappropriating more than $100 million.
The city of Redlands has terminated its agreement with Shangri-La Industries to provide housing for the homeless amid allegations the embattled Los Angeles developer misappropriated more than $100 million in state funds.
During its April 16 meeting, the City Council voted 4-0, with Councilmember Denise Davis absent, to terminate its agreement with Shangri-La under the state Homekey program, citing the developer’s breach of its obligations.
Assistant City Manager Chris Boatman said the city will continue to provide $510,000 annually as an operating subsidy to house homeless at the former Good Nite Inn in Redlands, now Step Up in Redlands, which Boatman said houses 132 formerly homeless residents.
“This doesn’t change our operating subsidy, or our commitment to the project, that will continue to be allocated per the Homekey II agreement, but it gives the city full control to ensure that money is spent appropriately and toward operational expenses,” Boatman said during the meeting.
Essentially, city spokesperson Carl Baker said, termination of the city’s agreement removes Shangri-La as a pass-through for those funds to ensure they are used as intended — for Step Up in Redlands. The city began paying the $510,000 subsidy last year as part of a seven-year pilot program.
Redlands partnered with Shangri-La and Step Up on Second, a Santa Monica-based nonprofit that provides services to the homeless, in 2022 when the state awarded Redlands $30 million during the second round of funding for its Homekey program, hence Boatman’s reference to the “Homekey II” agreement.
Under terms of the agreement, Shangri-La purchased the former Good Nite Inn at 1675 Industrial Park Ave. and upgraded it to include, among other things, kitchenettes. The motel reopened as Step Up in Redlands in January 2023.
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.
Mayor Eddie Tejeda said termination of the city’s agreement with Shangri-La puts it in a better position to ensure services are being provided to homeless individuals living at the converted motel.
Boatman concurred, adding, “The hope is that we’ll find a new owner of that property very soon. This will definitely posture us in the best possible way to move forward with whomever that may be, as well as ensuring that in the meantime it’s managed appropriately.”
Redlands resident Andy Hoder asked during the meeting if there would be any penalties or liabilities resulting from the city’s termination of the agreement. Boatman said there would not be because the termination was properly noticed.
Resident Bruce Laycook asked if the city was still continuing its partnership with Step Up. “It seems like if we’re terminating the agreement, it puts things into kind of a gray area,” he said.
Boatman said the city has a separate agreement with Step Up that will not be affected.
“There’s already another existing agreement in place with only Step Up that maintains operations, and we’ll continue to have separate agreements in that nature to keep operations going moving forward,” Boatman said.
Problems began surfacing for Shangri-La when lenders and contractors complained they were not being paid in late 2022. Dozens of mechanic’s liens totaling millions of dollars have been filed over the past year at recorders’ offices in San Bernardino, Ventura and Monterey counties, where the Homekey projects were located.
At the San Bernardino County Recorder’s Office alone, more than $2 million in liens were filed from March 7 to May 3, 2023, by contractors and suppliers not paid for work completed at the former Good Nite Inn in Redlands and the former All Star Lodge in San Bernardino, now Step Up in San Bernardino.
In January, the state Department of Housing and Community Development sued Shangri-La and its partners in the projects, including the city of Redlands, the county of San Bernardino, and Step Up on Second, alleging they “breached their obligations” under terms of their agreements with the state.
According to the lawsuit, Shangri-La 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.
The state also alleges in its lawsuit that for each of its Homekey-funded projects, Shangri-La used the address of each motel to create undercapitalized shell companies to engage in misconduct. All the hotel properties face possible foreclosure, according to the suit.
A pretrial hearing is scheduled for May 22 at the Spring Street Courthouse in Los Angeles.
Last month, Shangri-La sued its former chief financial officer, Cody Holmes, for $40 million, alleging he embezzled millions of dollars from the company so he and his then girlfriend could live an indulgent lifestyle. He used the money to host extravagant parties, cover $46,000 a month in rent at a leased home in Beverly Hills, travel regularly on private jets, lease exotic cars — including a 2021 Bentley Bentayga and a Ferrari Portofino, according to the suit.
Brian A. Sun, a Los Angeles attorney representing Shangri-La and its CEO, Andy Meyers, declined to comment Tuesday. He did, however, say the developer is working on restructuring Homekey proposals and plans, which include Step Up in Redlands, as some of the projects are underwater and need refinancing.
