A developer that accepted millions of dollars from a massive program to house the homeless is under investigation by the state for failing to live up to its contractual obligations and stiffing subcontractors who rehabbed facilities in the Inland Empire, Thousand Oaks and other California communities.
Pablo Espinoza, a spokesman for the California Department of Housing and Community Development, confirmed in an email that the agency is investigating Shangri-La Industries of Los Angeles and has asked the Attorney General’s Office for assistance.
“Shangri-La is in breach of contract,” Espinoza said.
In a letter dated Dec. 4, the housing department informed Shangri-La Chief Executive Officer Andy Meyers and Chief Financial Officer Cody Holmes that they had breached their contracts with the state and the developer’s partner agencies under California’s Project Homekey.
Gov. Gavin Newsom launched Project Homekey in June 2020 to protect the homeless from the threat of the coronavirus pandemic. To date, 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 to the homeless.
Using the Homekey funds, Shangri-La Industries purchased motels under agreements with San Bernardino County, Redlands and three other California cities — Thousand Oaks, Salinas and King City. In Southern California, Shangri-La’s homeless housing projects included the former All Star Lodge in San Bernardino, the former Good Nite Inn in Redlands and the former Quality Inn & Suites in Thousand Oaks.
Numerous failures
A letter from Cari Scott, the housing department’s assistant deputy director of financial assistance, warned Meyers and Holmes: “The Department’s review is ongoing but to date has revealed numerous failures to comply with contractual and regulatory obligations across (Shangri-La Industries’) portfolio.”
Among the violations Scott noted in her letter were Shangri-La’s lack of communication on the status of its projects, failure to meet performance milestones and failure to record affordability covenants to ensure properties remain as affordable housing.
Additionally, Scott noted other “serious violations” of standards agreements, including unilateral actions by Shangri-La such as refinancing its motel properties without written authorization from the housing department.
“Due to the serious breach of contract issues found, the Department has determined that (Shangri-La Industries) is not meeting the Department’s requirements in demonstrating its ability to own, operate, and develop affordable housing developments,” Scott said in her letter.
The Real Deal, a real estate news outlet, reported that Shangri-La secured at least $121 million from the state under Project Homekey from 2020 through 2022. The developer now owes about $41.3 million in delinquent loans — an amount that will keep accruing until the debt becomes current.
Holmes did not respond to repeated texts and phone calls seeking comment. Requests to speak to Meyers and repeated telephone calls to Shangri-La’s Los Angeles office went unanswered.
But in a recent interview with CalMatters, Meyers blamed the state, in part, for his company’s quagmire, accusing the housing department of taking months to approve affordability covenants, insisting that triggered other problems associated with the motel conversion projects. He also told CalMatters that the motel projects came in overbudget due to property taxes, and that the developer had to pay due to the state’s delay in approving the affordability agreements.
Espinoza denied Meyers’ allegations, and told CalMatters the state housing department couldn’t have approved the agreements after Shangri-La had already taken out the loans.
Troubles emerged in Redlands
The Southern California News Group first reported on Shangri-La’s problems involving its Homekey projects in May, when it learned the developer had failed to pay its contractors and subcontractors on the former Good Nite Inn project in Redlands, and that more than $2 million in mechanics liens had been filed with the San Bernardino County Recorder’s Office.
Shangri-La also was served its first default notice in May by its lender, Arixa Institutional Lending Partners, demanding $227,000 from the developer. Shangri-La paid up and staved off foreclosure, but not for long. In September, the developer was served its second default notice. This time, it owed Arixa $332,000.
On Thursday, Dec. 21, notices of a trustee’s sale were posted on the doors of every tenant at the former Good Nite Inn, now called Step Up in Redlands, informing them the property was in default and that the trustee, Chicago Title Co., was planning to sell it to the highest bidder at an auction scheduled for Jan. 11.
That set off a panic among tenants.
Redlands spokesman Carl Baker said in an email on Friday, Dec. 22, that the city does not own the property, has no control over the lender and was unaware the foreclosure sale notices would be posted. However, as soon as it learned of the situation, the city immediately asked the lender to postpone the sale.
On Friday, Baker reported that Arixa had agreed to “temporarily postpone” any foreclosure of the property.
Exploring solutions
“The lender and the City are exploring both short-term and long-term solutions, including a longer term postponement of any foreclosure sale, that would prevent or limit discomfort and hardship to tenants residing at the property,” he said.
Baker said the city also is working with all involved parties to address the issues raised in the Dec. 4 letter from the state housing department, and ensure that Step Up in Redlands remains fully operational and almost fully occupied.
The state awarded Redlands $30 million in Homekey funding in March 2022 to renovate the former motel to a 99-unit facility to serve the city’s homeless population. Redlands received the largest chunk of $105 million in Homekey funding that also went to San Bernardino County, Thousand Oaks, Salinas and King City.
The lion’s share of the Redlands money went to Shangri-La for the purchase of the motel, renovations and ongoing expenses to house the homeless.
Among the subcontractors left holding the bag on the Redlands project was Safeway Electric, which did electrical work at the former Good Nite Inn during renovations. Safeway is owed more than $457,000 for its work, according to a lawsuit filed in San Bernardino Superior Court in July against Ontario-based Northstar Development & Construction Inc., the lead contractor on the Redlands project.
“I think that Andy Meyers should probably be in jail,” said Melissa Miller, senior account specialist at Safeway Electric in Riverside. “I think this is awful that it’s been allowed to get this far.”
Step Up in San Bernardino
The San Bernardino County project received $8.3 million in Homekey funding for the purchase of the former All Star Lodge, at 450 N. G St. in San Bernardino, to help house some of the city’s homeless. The project launched in 2020 and opened in March 2023, county spokesman David Wert said.
Wert declined to comment on the state investigation and the letter sent to the county by the housing department.
Subcontractor Adolfo Gomringer said Shangri-La still owes him $93,000 for the work his company did at the former All Star Lodge. Gomringer, 34, of Los Angeles said he worked on the Step Up in San Bernardino project, off and on, from March 2021 through December 2022, doing demolition and installing metal framing, drywall and flooring.
Gomringer said he’s been trying for the past year to get Shangri-La to pay up. He said his last communication with Shangri-La came on Oct. 12 via email from CFO Cody Holmes, who informed Gomringer he would get back to him later that day with an update. He never did, and Gomringer said it was the last time he heard from Holmes.
“I have $100,000 in credit card debt because of this,” he said, noting that he was forced to use credit cards to cover expenses such as materials and employee pay.
Gomringer said the $93,000 owed him by Shangri-La would go a long way to clearing that debt.
“Hopefully, it comes in because we’ve really got to settle this. We’re keeping our fingers crossed,” Gomringer said. “I have never not paid my employees, and I want to keep that going.”
To date, only three of the seven Homekey projects under investigation by the state — Step Up in San Bernardino, Step Up in Redlands and Step Up in Salinas — are housing the homeless.
Step Up CEO shaken
Tod Lipka, president and CEO of Step Up on Second in Santa Monica, said in a telephone interview Friday that the nonprofit was shaken by the news about the financial state of the seven Homekey projects and the state review.
“We were really surprised and devastated to see it had gotten to that level of breach of contract,” Lipka said. He said Step Up has embarked on several successful homeless housing projects with Shangri-La in recent years, including four in Los Angeles.
He said responsibility for all finances and property acquisitions falls on Shangri-La, whereas Step Up handles the property management and homeless services side of the operations.
He said Step Up also has not been paid by Shangri-La for some of its services in Redlands, San Bernardino and Salinas in the past two years, and now is in discussion with officials in San Bernardino County, Redlands and Salinas to negotiate reimbursement.
“Step Up is very interested in being in dialogue with all the partners to find a solution for this housing to move forward,” Lipka said.
Salinas mayor concerned
Also expressing serious concerns about Shangri-La was Salinas Mayor Kimbley Craig.
“Shangri-La’s many serious breaches of their contractual obligations have created challenges for us and many other cities across the state,” Craig said in an email.
The city, Craig said, has received more than $36 million in Homekey funds for three motel conversion projects, but only one — at the former Good Nite Inn — is actually providing housing to the homeless.
“Shangri-La’s failures have affected the cities, the state, the residents of those facilities, as well as the many contractors who have done work on these projects but have not been paid by Shangri-La,” Craig said.
