The State of California has filed suit against virtually all of the entities involved in seven state-and-federally-funded projects in five cities, including ones involving the County of San Bernardino and the City of Redlands, to house the homeless.
While the difficulties that surfaced with regard to the financing and administration of the projects in question were primarily the result of what the state alleges was fraud, defaults and failure to perform on the part of the Los Angeles-based contractor employed by the five cities to make conversions of existing hotels or motels into permanent residential quarters, the governmental entities that took the lead in undertaking the projects together with the Santa Monica-based nonprofit those cities brought into serve as both the service provider to the homeless living within the facilities and property manager of the conversions as well as 18 other entities that became involved in the properties including lenders, law firms, foreclosure companies and title companies have also been sued.
California Attorney General Rob Bonta and his office are serving as the legal representatives of the California Department of Housing and Community Development in the suit. Several of representatives of the entities caught up in the legal action have asserted that they and at least some of the other parties named as defendants in the suit engaged in no actual wrongdoing, willfully or unwilfully, and that being subjected to the bother and expense of the lawsuit based upon the negligence or willful wrongdoing of one or perhaps more of their co-defendants will result in some of those entities and perhaps other governmental entities deciding to refrain from undertaking homeless assistance projects in the future because they do not want to run the risk of having to expend city or county resources on a worthwhile undertaking only to be faced with state-mandated punishment if one of the participants in the effort does not live up to its part of the bargain.
The auspices under which the projects that are at the center of the legal contretemps is that of the Homekey Program, what Governor Gavin Newsom touts as California’s nation-leading homeless housing initiative. The cities of Thousand Oaks, Salinas, King and Redlands, as well as the County of San Bernardino actively sought, and ultimately were selected by the California Department of Housing and Community Development to receive, Homekey grants, which consisted of money available through the Coronavirus State Fiscal Recovery Fund, which in turn had been established by the federal American Rescue Plan Act of 2021. Essentially Thousand Oaks, King, Redlands the County of San Bernardino proposed to make a single conversion and the City of Salinas was seeking to carry out three conversions of previously existing hotels or motels into residences for the homeless. In all seven cases, the cities. county contracted with Los Angeles-based Shangri-La Industries, LLC to complete the conversions and Santa Monica-based Step Up on Second, a nonprofit, to manage the facilities. In turn, Shangri-La, in return for the four cities and the county eventually passing through to them the state and federal funds, undertook the project, securing loans from PMF CA Real Estate Investment Trust, Qualfax, BMO Harris Bank, California TD Specialists, PPRF Real Estate Investment Trust, Lone Oak Fund, Arixa Institutional Lending Partners, LLC; Fairview Loan 123 LLC; 310 Real Estate Investment Trust, Medalist Partners Asset-Based Private Credit Fund III Commercial Real Estate LLC. Medalist Partners Asset-Based Real Estate Investment Trust III and Pacific Western Bank. Further involved were the Tullius Law Group and the Law Firm of Foley & Lardner, the Fidelity National Title Corporation and Chicago Title Company.

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