As homeless assistance projects go, the Step Up homeless faciltity, which had been converted from the former Good Nite Inn in Redlands was an overwhelming success. Insofar as other efforts to formulate a solution to moving people off the streets into a dignified living setting, Redlands city officials had achieved what scores, indeed hundreds and thousands, in actuality, almost all of other elected officials in California had been unable to attain: the application of money into a program where the money wasn’t squandered or eaten up by short-term solutions or consultants and service providers who used the money for salaries or expenses and misdirected the money from those it was intended to help: the destitute.
What Redlands had done was brilliant in its simplicity and workability. The city had taken the Good Nite Inn, a struggling and failing hotel, acquired it using state and federal money, converted it into primitive but yet dignified apartments, each with modest living room, bedroom, bathroom and kitchenette, and then filled it with the denizens of the streets, those who would otherwise be living in alleyways or parks or under freeway on-or-offramps or railroad trestles. Moreover, the city had done it in a relatively short period of time, from conception to occupancy.
One might find some other examples of a charitable effort involving churches or a private institution here or there that had done as well, but those were far in between. Virtually nowhere else among the State of California’s governmental entities – the state government itself, the 58 counties or the 481 cities other than Redlands – had such a [solution] been conceived, articulated, formulated and planned out and then been executed upon. No fewer than 96 individuals who had been without a roof over their heads, now were sheltered from the elements, sleeping on beds, eating meals they had cooked themselves, showering or bathing in some cases daily, using toilets that flushed and living with some modicum of dignity.
To be sure, Redlands had not gone it alone, and it had been dependent on funding it accessed from the state and elsewhere to carry off what it had accomplished, but it had overcome the lethargy of inaction and the inertia of resistance and avoided the pitfalls of waste and misdirection, opening up a facility with speed and aplomb that many others marveled at.
Then, the State of California – the California Attorney General’s Office and the California Department of Housing and Community Development – sued the City of Redlands.
According to the state attorney general and the department of housing, virtually all of the entities, governmental or otherwise, involved in seven state-and-federally-funded projects in five cities, had acted negligently, irresponsibly, greedily or with malice in their efforts to house the homeless. Among those governmental entities were, the state maintains, the County of San Bernardino and the City of Redlands.
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 City of King, the City of Redlands, the City of Salinas, the County of San Bernardino and the City of Thousand Oaks to make conversions of existing hotels or motels into permanent residential quarters. In addition, according to the state, 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 also deserved to be sued.
California Attorney General Rob Bonta acted as the legal representative of the California Department of Housing and Community Development in the suit. At first blush, several of representatives of the entities caught up in the legal action 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 would result in some of those entities and perhaps other governmental entities deciding to refrain from undertaking homeless assistance projects from here on out 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. While the state officially scoffed at that claim, privately, the Sentinel has learned, state officials acknowledged that some of the named defendants, including the City of Redlands, were no less victims than was the state in the matter.
In February, the company at the heart of the legal maelstrom, filed suit against the individual many believe is the party responsible for the diversion of money which has so concerned the California Department of Housing and Community Development. If the allegations contained in that civil complaint are accurate – as they appear to be – the larger question becomes how it is that the California Attorney General’s Office has failed to use is criminal prosecutorial authority in going after the actual perpetrator of wrongdoing – one who is driving a Bentley and a Ferrari while living in not one but two mansions in Beverly Hills – and why it used its civil prosecutorial authority to malign the names of Redlands city officials as well as others whose action and comportment in this circumstance have been little short of exemplary.
The Good Nite Inn, located at 1675 Industrial Park Avenue in Redlands, opened in January 2023, with 98 rooms available to those who needed them. Two months later, the converted All Star Lodge in San Bernardino opened, with 76 units available for the chronically homeless.
In homage to the Santa Monica-based nonprofit managing the facilities, the Good Nite Inn was renamed Step Up in Redlands. The former All Star Inn in San Bernardino was renamed Step Up in San Bernardino.
As it turned out, those were the only two of the seven undertakings entrusted to Shangri-La Industries by the combination of San Bernardino County, Redlands, Thousand Oaks King and Salinas that reached completion.
Shangri-La’s performance across the board had been somewwhat spotty, it turned out, as lenders were not seeing any return or debt service on their loans and both general contractors and subcontractors were not paid past their first dozen paychecks. Those contractors began recording mechanics liens totaling into the millions of dollars against the Shangri-La at the four county recorder offices where the Homekey projects were being pursued. That included some $2.12 million in liens against Shangri-La form the work at the Good Nite Inn and the All Star Lodge at the San Bernardino County Recorder’s Office.
Despite those financial difficulties both Step Up in Redlands and Step Up in San Bernardino are yet operating.
The auspices under which the Redlands project and the one in the City of San Bernardino pursued by the the County of San Bernardino as well as the one in Thousand Oaks, another in King and three in Salinas which 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 and 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 it 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.
According to the lawsuit, Shangri-La Industries received more than $114 million in Homekey funds from the state to convert the hotels/motels into permanent supportive housing in San Bernardino, Redlands, Thousand Oaks and two Northern California communities. The developer then granted and recorded deeds of trust to secure loans from the third-party lenders. Doing so without first obtaining the California Department of Housing and Community Development’s authorization violated the terms of the Homekey agreements, according to the state.
That detail might have been missed and the matter involving violation might have flown under the radar except that Shangri-La defaulted on the loans.
When Shangri-La defaulted on the loans, the lenders began the foreclosure process, stepping on the Department of Housing and Community Development’s title to the relevant properties.
According to the suit, “Defendants Step Up and Shangri-La Industries breached the agreements in several material ways, including 1) by conveying title on acquisition of the property to a separate partnership entity that was not identified as a grantee/contractor in Agreement 17166 without requesting or receiving the Department’s express prior written approval; 2) by encumbering the property with one or more deed of trusts and using the property as collateral for loans without requesting or receiving the Department’s express prior written approval; 3) By failing to comply with the restrictive use provisions, as applicable; 4) by failing to pay contractors hired to rehabilitate the properties resulting in mechanics liens being placed on the property. 5) By failing to pay debt on the property causing the court appointment of a receiver over the property [various properties].”
According to the state, the lender defendants “in performance of their due diligence responsibility, were on notice, as set forth in Civil Code section 1217, of encumbrances or potential encumbrances of the property in the form of the restrictive use covenants and Regulatory Agreement obligations specified and described in the Homekey Standard Agreements. Despite such notice, the Lender Defendants issued loans to the Property Titleholder Defendants purporting to be secured by first or second priority encumbrances on the properties, rather than subordinate to the use restriction/Regulatory Agreements required by the Homekey Standard Agreements. The property titleholder defendants and defendants Step Up and Shangri-La Industries were specifically aware of the restrictive use covenant/regulatory agreement requirements in the Homekey Standard Agreements and purposefully sought to conceal and did conceal the loans from the Department [of Housing and Community Development]. The deeds of trust filed by the lender defendants relating to loans secured by the properties to which the Homekey standard agreements relate are adverse to the first-position lien priority of the Homekey use restriction /regulatory agreement, as required by the Homekey standard agreements, and they jeopardize the purpose and intent of the Homekey statutes and use of Homekey funds.”
“All seven Homekey properties in which (Shangri-La Industries) was a private grantee are at risk of imminent foreclosure,” the lawsuit states.
In six of the seven cases involving the converted hotels/motels, Shangri-La and the cities and county it partnered with did not make a timely recordation of the use restrictions on the converted to ensure they would be used solely for interim or permanent housing.
Comes now, however, Shangri-La Industries with an explanation – in the form of a civil suit against its former chief financial officer, which goes quite a distance in explaining what occurred.
The reason Shangri-La Industries, as the developer of those homeless facilities, quit staying current on its bills and was no longer able to pass through the federal and state funding being used to convert those hotels/motels permanent homeless shelters was that 29-year-old Cody Holmes, who had been Shangri-La CFO until he was fired in January, had spent millions of those dollars on himself, or more accurately on himself and his now former girlfriend, while diverting Homekey money into accounts he, and he alone, controlled as well as toward purchases of Beverly Hills real estate, expensive cars, and travel to exotic locations.
While there had been indications that should have been picked up upon by Shangri-La’s corporate officers well over a year ago that things were amiss, a critical and comprehensive examination of the companies books was not undertaken by independent auditors and those with the company not involved in the diversions until after the California Attorney General’s Office filed suit in January. That was because Holmes occupied the one position with the company from which a perspective on the corporation’s finances could be glimpsed and understood.
Holmes was still a 20-year-old student at USC in 2014 when he was given a position as an intern at Shangri-La Industries. He moved into a full-time position with the company after he obtained his bachelor’s degree from USC as an intern in 2014, when he was still an undergraduate at the University of Southern California, according to the company’s lawsuit. He remained with the company as a junior financial officer while he pursued a master’s degree in finance at USC, acceding to the position of Shangri-La’s director of finance in 2019.
Less than six months later, Shangri-La’s chief executive officer departed, and Chief Executive Officer CEO Andy Meyers replaced him with Holmes. As CFO, Holmes oversaw Shangri-La’s finances, was a signatory on its bank accounts and held sway over accounting for the company.
Beginning as early as 2018, Holmes began testing the limits of his autonomy within the company, and may have been directly embezzling from it as early as 2019. In 2018, he had altered an operating agreement in which he had conferred upon himself a 50 percent ownership of the company. That document apparently went unremarked by other corporate officers until recently. The company has documented that there were major diversions of funds by 2022.
According to the lawsuit filed against Holmes by Shangri-La in Los Angeles Superior Court, Holmes, despite his seeming youth, had gained Meyers’ complete trust, which Holmes “exploited… in order to to enrich himself and his then-girlfriend.”
That then-girlfriend is Madeline Witt, for whom Holmes purchase, using Shangri-La funds, a $111,000 Birkin bag, another $16,839 for a Hermes Orange Togo Birkin, a $35,000 Audemars Piaget diamond watch and a $127,073 53-carat weight diamond necklace.
Though Witt was never officially a Shangri-La employee, Holmes managed to created an email address for her with a Shangri-La corporate affiliate and added her as an authorized holder of an account for another arm of the company. In this way, according to the suit, “[Holmes] went to significant lengths” to transfer money and assets to Witt.
Homes engaged in all sorts of extravagant spending, purchasing a 2021 Bentley Bentayaga and a Ferrari Portofino, both of which he had the pink slips to. Using a loan made to Shangri-La, he purchased in July 2022 through a company he created, Holmes Capital, a seven-bed, 11-bath 11,000-square-foot mansion at 9301 Cherokee Lane in Beverly Hills for $13.4 million. He had paid down, using Shangri-La funds something approaching $4.3 million of the principal on that loan, but by last September was facing a $9.1 million foreclosure on the property, which he staved off by filing for bankruptcy. His lawyer now maintains the property is worth $25 million, and Holmes is seeking to sell the property through Holmes Capital.
Holmes also used well over half of a million dollars in Shangri-La funds to pay for a $48,000 per month lease on another Beverly Hills property for over a year. In addition, he laid out $54,400 in company funds on 20 VIP passes to the Coachella Valley Music and Arts Festival and another $43,475 for private jet travel.
The lawsuit references sixteen separate known “embezzling transactions” that Holmes and Witt engaged in from July 2022 to October 2023 by which $7.3 million in company funds went into accounts the then-couple separely controlled. According to Shangri-La, Holmes was able to make use of Shangri-La’s company’s payment processing software to steer payments into accounts he controlled. Holmes forged Meyers’ signature on at least four occasions, according to the company. Holmes was able to elude detection by preventing the company’s controller from having access to the bank accounts he was pilfering from. Holmes was also able to have certain information bypass Meyers through a stratagem in which he created a company email account for Meyer which only Holmes had access to. Additionally, Holmes created more than one phone line for Meyers, which terminated with a phone in Holmes possession and control. In addition, Holmes managed to receive mail delivered by the U.S. Postal Service to the company headquarters addressed to Meyers, which he screened before removing certain items and delivering the remainder to Meyers.
According to Shangri-La’s attorney, Brian A. Sun, the “mismanagement, lies and outright theft,” Holmes engaged in “plunge[d] Shangri-La into financial chaos” and thereby doing the company “tremendous reputational damage.”
Holmes’ actions were a direct and proximate cause of the company defaulting on its loans relating to the Homekey properties, which triggered the companies unintentional violation of its contracts with the state.
Holmes oversaw Shangri-La’s loans and its grants from state and federal agencies, including the Project Homekey funding, according to the lawsuit states. Under the terms of the Homekey grants, Shangri-La was prohibited from taking out loans on the properties intended to house the homeless, the intention being that the grants would cover the purchase and renovation of the hotels/motels in question, allowing the shelter programs to function for three to four years before having to be replenished through some other form of funding.
In defiance of the regulations attending the provision of the grants, Holmes, in the guise of Shangri-La, borrowed tens of millions of dollars against its Homekey properties, ultimately going into default and then foreclosure on those loans. The state is seeking to stop foreclosure auctions and obtain court orders consigning the properties to use as affordable housing.
The lawsuit maintains Holmes did not disclose to Meyers or other Shangri-La corporate officers when payments on those loans ceased. In the case of one of the properties in Salinas, according to the suit, Holmes forged Meyers’ signature on documents to refinance a $9.7 million loan thereon.
The lawsuit delineates action that Holmes was taking right up until the time that the state filed suit against all of the defendants in which he was securing loans against the properties, without the knowledge of any of the defendants. On January 2, according to the suit, Holmes phonied up a letter to the California Department of Social Services purported to be from an employee of a lender that showed Shangri-La was yet “in good standing.” In actuality, the lender referenced was a fictional company, and the letter was a forged signature of an employee with a different bank.
Sun has petitioned the court for a restraining order against both Holmes and Witt to prevent them from removing money from eight accounts controlled by Holmes and one controlled by Witt into which they over the last three to four years have diverted Shangri-La money.
Sun said that Shangri-La has “significant concerns” Holmes is “dissipating the assets he absconded with, that being the money he stole and is converting. He’s liquidating those assets, turning them to cash, and then possibly moving them offshore and moving them in a way that would not be reachable to his creditors.”
The suit calls for both Holmes and Witt to be assessed damages greater than $20 million for their embezzlements and another $20 million in damages due to the financial exposure to third parties and lost business income.
Efforts by the Sentinel to learn from the California Attorney General’s Office and the California Department of Housing and Community Development whether it is now prepared to drop the lawsuit against the City of Redlands, the County of San Bernardino and the other defendants pursuant to verification of the facts asserted in the lawsuit filed by Shangri-La against Holmes and Witt, provoked no response.