$2.7 million for homeless housing ended up at nonprofit, attorneys say

When Gov. Gavin Newsom launched his $3.4-billion Challenge Homekey homeless housing program, L.A.-based actual property developer Shangri-La Industries and the Santa Monica nonprofit Step Up on Second Avenue have been among the many high recipients of its largesse.

The organizations have been awarded greater than $114 million in Homekey funds to transform seven motels in San Bernardino, Ventura and Monterey counties into studio residences for previously homeless tenants.

However as a substitute of making a whole bunch of housing models for a few of California’s neediest people, the tasks turned mired in monetary disarray. Right now most sit empty and unfinished. All seven have been foreclosed on. To date Shangri-La, because the accomplice that dealt with all of the financing, has been the primary goal of a civil lawsuit by state Atty. Gen. Rob Bonta and media experiences in regards to the state of affairs.

However just lately filed courtroom paperwork counsel that Step Up — certainly one of L.A. County’s best-known homeless housing and repair suppliers — had an financial curiosity within the Homekey tasks not beforehand made public, and will face monetary fallout.

Step Up President and Chief Govt Tod Lipka has mentioned his group is cooperating totally with Bonta’s workplace and was solely a service supplier within the tasks, with no half in dealing with Homekey funds, acquisition or financing.

New courtroom paperwork counsel a extra sophisticated relationship, with Step Up invested alongside Shangri-La within the tasks’ potential long-term income; and that in late 2022 Step Up bought that curiosity to Shangri-La for $2.7 million. In Chapter Court docket filings, Shangri-La’s attorneys declare that cash was meant to go towards development on a Homekey venture in Salinas that’s nonetheless empty. As a substitute, mentioned Brian A. Solar, an legal professional working with Shangri-La, the cash went to Step Up as a result of it wanted money and requested Shangri-La to purchase out its revenue curiosity.

“They got here to us once they have been in misery and we helped them out, and now we’re paying the worth,” Solar mentioned. “Having that additional $2.7 million would’ve been actual helpful when these lenders have been coming round asking for cost.”

Now, with Shangri-La pursuing a chapter, Step Up might face efforts by collectors to claw again these funds.

Lipka says he’d believed the funds got here from Shangri-La’s “current funds,” not funds meant for development.

“We’re solely starting to find the extent of the alleged fraud and deception dedicated by Shangri-La,” Lipka wrote in an e-mail to The Instances, echoing claims made by Bonta.

In January, Bonta filed a civil lawsuit in opposition to Shangri-La in L.A. County Superior Court docket on behalf of the California Division of Housing and Group Improvement, accusing the corporate of fraud and breach of contract and demanding it return the Homekey funds. Its companions, together with Step Up, lenders and cities and one county the place the tasks have been deliberate, have been listed as co-defendants.

Final month, a state audit discovered that California hasn’t adequately tracked the outcomes of $24 billion it’s spent on applications to struggle homelessness, together with Homekey, during the last 5 years. The seven housing tasks by Shangri-La and Step Up supply one instance of how troublesome it may be to steadiness urgency and oversight. Shangri-La acquired its Homekey grants instantly, upfront, based on the Division of Housing and Group Improvement. “This was this system construction, to disburse upfront with a view to rapidly purchase the tasks,” mentioned a spokesperson for the division. What precisely occurred to the greater than $114 million that Shangri-La acquired is unclear, however courtroom proceedings, together with the current filings involving Step Up, have begun to disclose some doable solutions.

Shangri-La’s web site describes the corporate as a “totally built-in, privately held, business actual property agency” engaged in “funding, growth, design, development, and administration companies, all below one roof.” It’s an offshoot of Shangri-La Leisure, a company began by the late philanthropist and movie producer Stephen Bing.

Step Up, based in 1984, offers psychological well being companies and housing to previously homeless people throughout Los Angeles. In 2023 the group served greater than 5,000 people, based on Lipka.

Previous to their Homekey collaboration, Step Up and Shangri-La labored collectively on different inexpensive housing tasks, together with 4 in Los Angeles utilizing funds from the town’s $1.2-billion Proposition HHH homeless housing bond. Typically, Shangri-La dealt with acquisition, financing and development, Lipka mentioned, whereas Step Up supplied tenant companies and property administration on the accomplished buildings.

“We totally anticipated them to carry out” on the Homekey offers, Lipka mentioned of Shangri-La, “as a result of that they had a historical past of performing.”

The Homekey tasks’ failures began with a number of short-term loans that Shangri-La took out in opposition to the properties to reinforce the Homekey awards. In the end Shangri-La defaulted on funds, sending the tasks into receivership and, ultimately, foreclosures.

Lipka mentioned he discovered one thing was amiss solely in late 2023, when he acquired default notices for a few of the loans. “After we requested Shangri-La, they supplied assurances — like they did with lots of the different entities in these offers, the cities in addition to the state — that they’re going to deal with it, they’re going to repair it, they’re going to deal with all the things,” Lipka mentioned.

Solely three of the seven buildings have opened to tenants, together with one in Salinas that’s partly occupied and working as a shelter, with shoppers staying in unrenovated rooms, based on courtroom paperwork; one other, empty venture in Salinas has fallen into extreme disrepair and at one level turned a house to squatters, based on a report by one of many court-appointed receivers.

Shangri-La and its proprietor, Andrew Meyers Abdul-Wahab, blame the corporate’s former chief monetary officer, Cody Holmes, for sending Shangri-La into monetary break. In February, Shangri-La attorneys sued Holmes in L.A. County Superior Court docket, searching for greater than $40 million in damages.

The criticism accuses Holmes of stealing cash meant for inexpensive housing and spending it on private bills — together with a $46,000-a-month rental dwelling in Beverly Hills, Louis Vuitton and Chanel purses and a $5,000 month-to-month lease for a Ferrari Portofino — and taking out loans in opposition to Shangri-La properties to cowl up his alleged embezzlement. (Holmes’ legal professional has but to reply in courtroom, and didn’t reply to requests for remark from The Instances.)

In a more moderen courtroom doc filed as a part of a rejected chapter try for one of many Homekey tasks, Shangri-La attorneys mentioned that in late 2022 the corporate additionally gave $2.7 million in mortgage proceeds meant for housing development to Step Up, in trade for Step Up’s stake in future income from the Homekey tasks.

Between November 2022 and January 2023, based on the movement filed in U.S. Chapter Court docket, Shangri-La paid Step Up two out of three scheduled buyout funds (the complete quantity was alleged to be about $3.6 million) for its “revenue participation pursuits and developer charges,” utilizing “mortgage proceeds which ought to have been used for its growth venture.”

In line with the agreements between Shangri-La and Step Up, obtained by The Instances, Step Up stood to earn 15% to 25% of potential future income on the tasks, in addition to $3,000 per unit in “pre-development” charges on a few of the buildings upon closing.

Different nonprofit executives concerned in inexpensive housing development say that $3.6 million is an unusually great amount to pay for a portion of the possible returns on income-restricted buildings, which usually take years or many years to show a revenue, if in any respect. The buyouts in 2022 and 2023 have been partly primarily based on per-unit charges for Step Up starting from $1,500 to $13,000, based on Chapter Court docket paperwork.

After the courtroom submitting, Lipka mentioned in an e-mail to The Instances that he had no thought the funds got here from cash earmarked for housing. In response to a query about how the 2 firms got here up with a worth for Step Up’s revenue pursuits, Lipka mentioned it was primarily based on “an mixture current worth” and referred additional inquiries to his attorneys.

Up to now, courtroom data have raised extra questions than they’ve answered about precisely how the Homekey funds for the seven largely vacant tasks have been used. In a declaration filed in federal Chapter Court docket in Could, Edwin W. Leslie, the receiver appointed for 4 tasks in Monterey County, mentioned Shangri-La hasn’t given him monetary data. “I used to be not supplied a single financial institution assertion, a single accounting of how the tens of millions of {dollars} of public funds have been used, a single development funds, a single contract with a contractor or sub-contractor, a single tax return, or a single piece of correspondence,” Leslie mentioned.

In a report filed in Monterey County Superior Court docket in late February, Leslie mentioned Step Up hasn’t cooperated with him both.

“The Receiver has not been profitable in acquiring obligatory monetary experiences or verification of funds from Step-Up On Second Avenue, Inc.,” he wrote. “Primarily based on info acquired thus far from third social gathering sources, Step-up might have acquired in extra of $20 million in funds from state, metropolis and county companies associated to those properties and operation of similar.”

Ultimately, Leslie issued subpoenas to the nonprofit to acquire data and paperwork, his lawyer confirmed.

“I do not know the place he bought that quantity from,” Lipka mentioned of the $20 million. “We’ve complied with all requests for info, each formally and informally, from each Edwin Leslie and the workplace of the legal professional common. And we regularly don’t have the objects that they request.”

Shangri-La, he mentioned, acquired the Homekey cash and may have all of the associated monetary data.

“We received’t deal with Shangri-La’s tasks.”