The City of Redlands has ended its relationship with Shangi-La Industries, one of the companies it partnered with to complete its landmark homeless shelter within the former Good Nite Inn on Industrial Park Avenue.
Redlands was one of just two governmental entities in California which was able to execute on completing permanent or semi-permanent housing for the homeless under the Homekey Grant program while working with Los Angeles-based Shangri-La Industries after that company’s chief financial officer embezzled millions upon millions of dollars from his employer, which greatly complicated the effort to complete seven homeless housing projects throughout California.
On April 16, Redlands terminated its contractual connection with Shangri-La in the aftermath of legal action taken by the California Attorney General’s Office on behalf of the California Department of Housing and Community Development against San Bernardino County and four cities relating to the Homekey grant program.
As part of Governor Gavin Newsom’s plan to combat homelessness in California, the State of California through its Department of Housing and Community Development in 2020 began offering grants to assist local governments – cities and counties – acquire motels, hotels, apartments and ond other suitable large properties to transition them into permanent housing for homeless individuals. The state enlarged the program the following year.
Shangri-La, under the leadership/ownership of its chief executive officer, Andy Meyers, found a niche for itself in serving as either a contract converter of those properties for the governmental entities obtaining those grants or substituting in as the owner of the property, making conversions and then sustaining itself by being paid by the grant-receiving cities out of the proceeds from the grants.
The City of Redlands, the County of San Bernardino, the City of King and the City of Thousand Oaks, were each recipients of a single Homekey Grant and the City of Salinas was the recipient of three Homekey Grants. All of them entered into arrangements with Shangrai-La to convert hotels, motels or other properties into a residences for the homeless. Involved in the arrangements were a host of other entities and companies, including 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, all of whom were lenders on various phases of the projects. Further involved were the Tullius Law Group and the Law Firm of Foley & Lardner, the Fidelity National Title Corporation and Chicago Title Company. A host of contractors were brought in to do subcontracting work on the conversions. Santa Monica-based Step UP On Second, a nonprofit, served in the role, or was intended to serve in the role of property manager on the seven/eight/ projects.
As it would turn out, however, Meyers had entrusted not just the financial management of Shangri-La to Cody Holmes, whom he had originally brought in as a 20-year-old intern when the latter was yet a USC undergrad in 2014, but a good deal of the company’s operations as well. In 2016, Homes was made a junior financial officer with Shangri-La. Then in 2019, while he was yet 24, Holmes became the company’s director of finance. Within a year, Holmes acceded to chief financial officer.
Through a series of subterfuges, including setting up an email account in Meyers’ name, routing Meyers’ physical mail to an internal Shangri-La mailbox to which he had first access and other diversions, Holmes was able to set up at least seven Shangri-La accounts Meyers had no knowledge of. Holmes then utilized money in those accounts to make $4.3 million in down payment and principal payments in July 2022 through a company he created, Holmes Capital, toward the purchase of a seven-bed, 11-bath 11,000-square-foot mansion at 9301 Cherokee Lane in Beverly Hills valued at $13.4 million, make over half of a million dollars in $48,000-per-month lease payments on another Beverly Hills property for over a year, lay 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, and purchase his then-girlfriend, Madeline Witt, 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. Simultaneously, Holmes was leasing, using Shangri-La funds, a 2021 Bentley Bentayaga and a Ferrari Portofino.
In late 2022, difficulties with the projects were first detected when Shangri-La proved delinquent in many of its payments to the various lenders and contractors involved. After an initial round and then a secondary round of phone calls, text messages, emails and letters in which representations were made by Shangri-La that the payments would be soon forthcoming, mechanic’s liens in the tens of millions of dollars were being recorded at the San Bernardino County, Ventura County and Monterey County recorder’s offices against Shangri-La, the cities and San Bernardino County.
Earlier this year, in January, the California Department of Housing and Community Development sued Shangri-La along with and its partners in the projects, including the city of Redlands, the county of San Bernardino, and Step Up on Second, together with 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, the Tullius Law Group, the Law Firm of Foley & Lardner, the Fidelity National Title Corporation and Chicago Title Company, alleging they “breached their obligations” under terms of their agreements with the state.
According to the lawsuit, Shangri-La received more than $114 million in Homekey funds from the state to convert the motels into permanent supportive housing in San Bernardino, Redlands, Thousand Oaks , King and Salinas. Shangri-La thereupon granted and recorded deeds of trust to secure loans from the host of lenders without first obtaining the state’s written authorization, as required under the Homekey agreements.
The state also alleges in its lawsuit that for each of its Homekey-funded projects, Shangri-La used the address of each motel to create undercapitalized limited partnerships to perpetrate the fraud, subjecting all of the properties, some fully converted and others only partially converted, to possible foreclosure.
Only the Redlands project and the San Bernardino project – the first consisting of the conversion of the former Good Nite Inn at 1675 Industrial Park Avenue in Redlands into 98 rooms entailing a kitchenette, living room, bedroom and bathroom opened in January 2023, and the second involving the conversion of the All Star Lodge in San Bernardino into 76 similar units available for the chronically homeless opened in March 2023 – met the goal of transforming previously existing hotels or motels into residences for the homeless.
San Bernardino County, Redlands, Thousand Oaks, King and Salinas failed to ensure that Shangri-La lived up to its performance requirements in its contract with them, according to the State of California.
Also according to the state, 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 matter is headed to trial in Los Angeles Superior Court with all of the defendants named yet involved in May.
On March 14, 2022, the California Department of Housing and Community Development awarded $29,020,000 to the City and its partners, Shangri-La Industries and Step Up On Second Street, Inc., to fund the acquisition of the Good Nite Inn. On May 24, 2022, Redlands, Shangri-La and Step Up signed a grant agreement with California Department of Housing and Community Development committing Redlands to putting up $3,573,485 as a matching contribution to the grant to finance the motel conversion and cover operations for at least five years.
On July 19, 2022, the city council approved a secondary grant agreement specifying the terms for the city’s disbursement of the operating subsidy to cover some or all of the ongoing costs of operating running the shelter. Under the terms of the agreement, upon Shangri-La meeting its obligations, the city was to disburse $3,573,485 in seven annual payments of $510,497.
Assistant City Manager Chris Boatman said that the project will remain intact and operational. Getting out of the contract with Shangri-La will not see the Homekey project terminated, but instead of the money going to Shangri-La, “full control over how the monies” will be spent – roughly $510,000 yearly – will return to the city, according to Boatman.
“We’re still under the Homekey agreement,” Boatman said.
The city council’s 4-to-0 vote with Councilwoman Denise Davis absent authorized City Manager Charles Duggan to send Shangri-La a notice of termination.
Duggan sent such a letter to Shangri-La, charging the company with a slew of defaults with regard to the original contract, including delinquencies and past due taxes, neglecting to apply for property tax welfare exemptions and unpaid loans.
In March, Shangri-La Industries, through its attorney, Brian Sun, filed suit against Homes and Witt, referencing 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 separately 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.
According to 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. 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 company which no longer employs him alleged.
That, of course, is between Shangri-La and Holmes. The city wants out of its relationship with Sangri-La and Meyers.
Despite Shangri-La’s failures, “The project was successfully implemented and I’m happy to report there’s about 132 homeless that currently reside there today,” Boatman said. He indicated the city is not detaching itself from Step Up On Second.”
Though the State of California is yet suing Redlands over the matter, the Sentinel is in possession of an internal California Department of Housing and Community Development communication that the state is not pursuing that litigation with the intention of forcing the city to pay for Shangri-La’s, and Holmes’, sins. The city was named to avoid an “empty chair” defense by Shangri-La being employed in its defense of the state’s lawsuit. If the state had not named all of those involved in the multiple debacles with the Homekey Grants, Shangri-La could point its finger at those others, saying they were responsible for what occurred. By having every conceivable responsible party named in the lawsuit, the State of California can play all defendants off against one another, in which case, it appears, the blame will be shown to rest with Shangri-La and Holmes.