Shangri-La Sued Over Misuse of Project Homekey Funds

(Editor’s note: This article first appeared in the Westside Current on May 30 and is reprinted with permission. In this third installment of the investigative series into California’s Project Homekey homeless housing program. Reporters look at the downfall of Shangri-La politically connected Los Angeles-based real estate development company and its connection to Homekey.)

By CHRIS LEGRAS, JAMIE PAIGE

 

Executives at a Shangri-La, a development company that received $121 million in taxpayer funds through Project Homekey, are accused of running a “real estate Ponzi scheme.” One executive spent millions of dollars on exotic cars, luxury vacations, and a $46,000 a month house in Beverly Hills

Project Homekey was a $3 billion state program championed by Governor Gavin Newsom to rapidly fund and produce homeless housing during the COVID pandemic.

In 2020, the State granted $121 million in Homekey funds to Shangri-La Construction, a politically connected Los Angeles-based real estate development company, to fund the purchase of 500 rooms in seven motels and to upgrade them to permanent supportive homeless housing (PSH). Nearly four years later, Shangri-La has delivered fewer than half of the promised units.

The company now faces bankruptcies, a flurry of lawsuits by lenders, contractors, suppliers, and the State, tens of millions in unpaid debts and liens, properties in receivership or facing foreclosure, and investigations by California Attorney General Rob Bonta and the state Department of Housing and Community Development (HCD). The company’s executives are accused of embezzling tens of millions.

PROJECT HOMEKEY – FAST HOUSING:

Newsom launched Project Homekey in June 2020 to fund the rapid acquisition and rehabilitation of PSH units for people who are homeless. In announcing the program Newsom declared, “we are on the precipice of the most meaningful expansion of homeless housing in decades.”

Speed was key. Project Homekey’s rapid roll-out and tight deadlines – cities and counties had to spend funds within four to six months of receiving them – distinguished it from past efforts to fund homeless housing.

The first round of funding focused on acquiring hotels and motels that were closed due to pandemic lockdown orders. The idea was to acquire properties quickly, make modest upgrades like installing kitchenettes and upgrading electrical systems, and bring them online in a matter of months rather than years.

The Westside Current’s investigation has revealed that in many cases Homekey’s fast pacing was one of its biggest weaknesses. Shangri-La is a prime example.

After closing motels with taxpayer money intended for homeless housing, Shangri-La’s leadership used the properties as collateral to secure loans and lines of credit that allegedly exceeded $56 million.

According to lawsuits filed by two of the lenders, BMO Bank and a firm called Medalist Partners Asset-Based Private Credit Fund, Shangri-La defaulted on those loans. Additionally, the firm faces at least 17 mechanics’ liens filed by contractors and suppliers for unpaid work. According to public records, 137 mechanics’ liens have been filed against the company since 2020.

On behalf of the state Bonta filed suit against Shangri-La this past January in Los Angeles Superior Court. The 321-page complaint alleges numerous breaches of the company’s Homekey obligations and seeks to recover $114 million in Homekey grants.

Other defendants included San Bernardino County and the cities of Redlands and Thousand Oaks, which “breached their obligations” under the terms of their agreements with the state’s Homekey program.

The Santa Monica-based homeless services provider Step Up on Second, which partnered with Shangri-La to provide services and manage the seven converted motels, is also named as a defendant.

Shangri-La filed for federal Chapter 11 bankruptcy protection on April 29, 2024, with the U.S. Bankruptcy Court in San Jose. All seven of that company’s Homekey properties face imminent foreclosure.

As reported in the Redlands Daily, the bankruptcy is said to affect three conversion projects, the former Good Nite Inn in Redlands, the former Quality Inn & Suites in Thousand Oaks and the former Sanborn Inn in Salinas, funded under Homekey. The fourth, a former Travelodge in San Ysidro, was funded under the state Community Care Expansion program.

The fates of other Shangri-La projects, including three buildings on the West Los Angeles Veterans Administration campus slated for 425 homeless veterans, and a former mortuary in downtown LA with 122 units of housing for low-income seniors, are unknown.

We reached out to Shangri-La for comment and did not receive responses in time for this story.

A Real Estate Ponzi Scheme

The lender’s lawsuit alleges the company improperly commingled funds for specific projects to support other failing Shangri-La ventures.

The company’s financial troubles emerged in an earlier lawsuit involving former CFO Cody Holmes. In a separate lawsuit against Holmes, Shangri-La claimed Holmes, who was promoted to the position in 2019, embezzled millions to fund a lavish lifestyle. Allegations include transferring company funds to shell companies and extravagant personal spending. The suit seeks a restraining order preventing Holmes from transferring funds to himself from nine company bank accounts he controls.

“For the past two years, defendant Cody Holmes has looted Shangri-La and its subsidiaries of public funds earmarked for Shangri-La’s affordable housing projects,” attorney Brian A. Sun said in a motion filed March 6. “A [temporary restraining order] will prevent the public funds embezzled by Holmes from being hidden, withdrawn, or used to purchase extravagant expenses.” Additionally, Holmes is the subject of multiple lawsuits from creditors who collectively are seeking millions in damages.

Shangri-La alleges in its suit that Holmes embezzled company funds and property to bank accounts and shell companies he set up and controlled. He also allegedly transferred funds to his suspected ex-girlfriend, Madeline Witt, 28, who is named as a co-defendant in the suit.

The company alleges that Holmes used the money to host extravagant parties, cover $46,000 a month in rent at a leased home in Beverly Hills, travel on private jets, and lease exotic cars including a 2021 Bentley and Ferrari.

Shangri-La further alleges Holmes purchased luxury items for himself and Witt, including high end handbags valued at nearly $128,000, a diamond necklace, a $35,000 diamond watch, and 20 VIP passes for the 2023 Coachella Music and Arts Festival valued at more than $53,000.

Empty Homekey Units

Over the last two weeks, the Westside Current has exposed more than 1,200 empty Homekey units in Los Angeles. The Shangri-La situation adds hundreds more to that count, raising further questions about accountability in a $3 billion taxpayer-funded program that was supposed to provide thousands of units in record time.

Other common themes that have emerged in the stories include millions in dollars of liens filed by unpaid contractors and the removal of existing residents from properties acquired through Homekey funds.

The seven Shangri-La Homekey properties are located in San Bernardino, Ventura, and Monterey counties. They were supposed to provide a total of 500 permanent supportive housing units.

According to official records and legal filings, four former motels for which Shangri-La was responsible remain empty and unfinished for more than two years after the company received funding to convert them to permanent supportive housing.

Two were renovated and fully occupied, a 98-unit former Good Nite Inn in Redlands (now called Step Up in Redlands), and a 76-unit former All Star Lodge in the city of San Bernardino (now Step Up in San Bernardino). As of March, a 44-room property in Salinas is near completion but has no timetable for full occupancy (13 residents had been housed in unrenovated units., when completed it was supposed to house 100 people).

Additionally, according to the San Bernardino County Recorder’s Office, between March 7 and May 3, 2023, contractors and suppliers on two Shangri-La Homekey projects filed more than $2 million in liens for unpaid work and materials at the Good Nite Inn in Redlands, and the former All-Star Lodge in San Bernardino.

 

HOMELESS REMOVED From COMPLETED PROJECTS

Ironically, as of last December three of the properties (Step Up in Redlands and Step Up in San Bernadino and Salinas) were housing formerly homeless Californians when the department began investigating Shangri-La for alleged violations of its contracts with the state.

During the investigation, residents were removed, and the properties have not been re-occupied, meaning that Shangri-La has reduced the number of units available for the homeless in the affected cities.

As CalMatters reported, these delays are also straining the budgets of several smaller cities like Salinas, which were depending on them to provide a significant number of housing units in areas otherwise short on services for the homeless.

Shangri-La CEO Andy Meyers blamed the state for delays in approving affordability agreements, while Step Up on Second, a nonprofit named in the lawsuit, expressed devastation over the potential harm to its clients and its own financial losses. Meyers stated, “The state has just taken forever to get these agreements out,” citing bureaucratic delays.

Meyers dismissed the claims of a Ponzi scheme in an interview with KCRW. “I’m not going to respond to that allegation at all,” Meyers stated. “We are an entity, Shangri-La Industries, and have a number of properties. But there’s no Ponzi scheme. Obviously, whoever made such an accusation doesn’t know what a Ponzi scheme is.”