When Governor Gavin Newsom presented his $3.4 billion budget Project Homekey homeless housing program, LA-based real estate developer Shangri-La Industries and Santa Monica nonprofit Walk down Second Street The top recipients of its donations included.
These organizations were awarded more than $114 million in Homekey funds to convert seven motels in San Bernardino, Ventura and Monterey counties into studio apartments for formerly homeless tenants.
But instead of creating hundreds of housing units for some of California’s neediest individuals, the projects fell into financial disarray. Today most of them lie vacant and unfinished. All seven have been closed. So far Shangri-La, the partner handling all the financing, has been a main target Civil lawsuit by state Attorney General Rob Bonta and media reports about the situation.
But recently filed court documents reveal that Step Up — one of L.A. County’s most famous Homeless Housing and Service Providers – Homekey had a financial interest in the projects, which had not previously been made public, and could have suffered a financial loss.
Todd Lipka, Step Up’s president and chief executive, said his organization is fully cooperating with Bonta’s office and is only a service provider on the projects, and has no role in Homekey funding, acquisitions or financing.
New court documents reveal the relationship is more complex, with Step Up investing in the potential long-term benefits of projects alongside Shangri-La; and Step Up selling that stake to Shangri-La for $2.7 million in late 2022. In bankruptcy court filings, Shangri-La’s lawyers claim the money was to be used for a construction project. Homekey Project in Salinas It still remains vacant. Instead, said Brian A. Sun, an attorney who works with Shangri-La, the money was given to Step Up because it needed cash and asked Shangri-La to buy out its share of the profits.
“They came to us when they were in trouble and we helped them, and now we’re paying the price for it,” Sun said. “When these lenders were coming for payment, having that extra $2.7 million would have been very helpful.”
Now, as Shangri-La is going bankrupt, Step Up could face efforts from lenders to recoup those funds.
Lipka says he believed this payment came from Shangri-La’s “existing funds,” not from funds earmarked for construction.
“We are just beginning to unravel the extent of the alleged fraud and deceit committed by Shangri-La,” Lipka wrote in an email to the Times. He reiterated the claims made by Bonta.
In January, Bonta filed a civil suit against Shangri-La in L.A. County Superior Court on behalf of the California Department of Housing and Community Development, accusing the company of fraud and breach of contract and demanding the return of Homekey funds. Its partners, including Step Up, the lender and the city and a county where the projects were planned, were listed as co-defendants.
Last month, a state audit found that California had not adequately tracked The results of the $24 billion Over the past five years it has been spent on programs to combat homelessness, including Homekey. Shangri-La and Step Up’s seven housing projects are examples of how difficult it can be to buy a home. Balance between urgency and oversightAccording to the Department of Housing and Community Development, Shangri-La received the Homekey grant directly, in advance. “That was the program structure, to distribute it in advance to get projects going as quickly as possible,” a department spokesperson said. What exactly happened to the more than $114 million Shangri-La received is unclear, but court proceedings, including recent filings involving Step Up, have begun to reveal some possible answers.
Shangri-La’s website The company is described as a “fully integrated, privately owned, commercial real estate firm” that is “engaged in investment, development, design, construction and management services, all under one roof.” It is an arm of Shangri-La Entertainment, an entity started by the late philanthropist and filmmaker Stephen Bing.
Step Up, founded in 1984, provides mental health services and housing to formerly homeless individuals in Los Angeles. According to Lipka, in 2023, the organization served more than 5,000 individuals.
Prior to the Homekey collaboration, Step Up and Shangri-La had worked together on other affordable housing projects, including four projects in Los Angeles using $1.2 billion in city funds. The proposal HHHH Homeless housing bonds. Generally, Shangri-La handled acquisition, financing and construction, while Step Up provided tenant services and property management in the completed buildings, Lipka said.
“We fully expected them to do well on the Homekey deals because they had a history of doing well,” Lipka said of Shangri-La.
The failure of the Homekey projects began with several short-term loans that Shangri-La took out against the properties to increase Homekey rewards. Eventually Shangri-La defaulted on payments, causing the projects to go into receivership and, ultimately, foreclosure.
Lipka said they only realized something was wrong in late 2023, when they received default notices for some of the loans. “When we asked Shangri-La, they assured us — as they have done with many other entities in these deals, cities as well as the state — that they would take care of it, they would fix it, they would take care of everything,” Lipka said.
According to court documents, only three of the seven buildings are open to tenants, including one in Salinas that is partially occupied and functioning as a shelter, with clients living in unrepaired rooms; another vacant project in Salinas has fallen into severe disrepair and at one point was home to squatters, according to a report from one of the court-appointed receivers.
Shangri-La and its owner Andrew Meyers Abdul-Wahab, The company’s former chief financial officer was convicted, Cody Holmes is accused of financially ruining Shangri-La. In February, Shangri-La’s lawyers sued Holmes in LA County Superior Court, seeking more than $40 million in damages.
The complaint accuses Holmes of stealing money earmarked for affordable housing and spending it on personal expenses — including a $46,000-a-month rental home in Beverly Hills, Louis Vuitton and Chanel handbags and a $5,000 monthly rent for a Ferrari Portofino — and taking out loans against Shangri-La Properties to conceal her alleged embezzlement. (Holmes’s lawyer has not yet responded in court, and did not respond to The Times’ requests for comment.)
In a recent court document filed as part of a rejected bankruptcy effort for one of the Homekey projects, Shangri-La attorneys said the company also loaned Step Up $2.7 million to build housing in late 2022 in exchange for Step Up’s share in future profits from the Homekey projects.
Between November 2022 and January 2023, according to the motion filed in U.S. bankruptcy court, Shangri-La paid two of three scheduled buyout payments (the full amount should have been about $3.6 million) to Step Up for its “profit participation interests and developer fees,” “using loan proceeds that should have been used for its development project.”
According to agreements between Shangri-La and Step Up obtained by the Times, Step Up will receive 15% to 25% of potential future profits on the projects, as well as $3,000 per unit as a “pre-development” fee after closing on some buildings.
Officials at other nonprofits involved in affordable housing construction say $3.6 million is an unusually large sum to pay for a portion of the potential returns on income-restricted buildings that typically take years or decades to turn a profit. Buyouts in 2022 and 2023 were based in part on per-unit fees ranging from $1,500 to $13,000 for Step Up, according to bankruptcy court documents.
After the court filing, Lipka said in an email to the Times that he had no idea that these payments were made from money earmarked for housing. Asked about how the two companies valued Step Up’s for-profit interests, Lipka said it was based on “an aggregate present value” and referred further questions to his lawyers.
To date, court records have raised more questions than they answered about how Homekey funds were used for seven mostly vacant projects. In a declaration filed in federal bankruptcy court in May, Edwin W. Leslie, the receiver appointed for four projects in Monterey County, said Shangri-La had not given him financial records. “I was not provided with a single bank statement, a single accounting of how millions of dollars of public funds were used, a single construction budget, a single contract with a single contractor or subcontractor, a single tax return or a single piece of correspondence,” Leslie said.
In a report filed in Monterey County Superior Court in late February, Leslie said Step Up also has not cooperated with her.
“The Receiver has not been successful in obtaining required financial reports or verification of funds from Step-Up on Second Street, Inc.,” he wrote. “Based on information obtained to date from third party sources, Step-Up may have received funds in excess of $20 million from state, city and county agencies related to these properties and their operations.”
Leslie eventually issued a subpoena to the nonprofit to obtain records and documents, his attorney confirmed.
“I don’t know where they got that number from,” Lipka said of the $20 million. “We have complied with all information requests, formally and informally, from Edwin Leslie and the attorney general’s office. And we often don’t have the items they request.”
He said Shangri-La received Homekey’s money and should have all the financial records related to it.
“We will not take over the responsibilities of Shangri-La.”
