The City of Redlands this week made a significant stride in distancing itself from the embezzlement scandal that two years ago threatened to thoroughly disconcert if not outright destroy the model homeless assistance program it had managed to establish.
Redlands was among one of dozens of California cities that moved to take advantage of money being offered by the State of California through its Department of Housing and Community Development via the so-called Homekey Program, which was being pushed by Governor Gavin Newsom at around the time of the COVID-19 pandemic in 2020.
The city partnered with Step Up on Second, the Santa Monica-based nonprofit to take possession of the Good Nite Inn, located on Industrial Avenue, and convert its 98 hotel rooms into mini-living quarters, complete with kitchenettes and bathrooms to house and support, variously, individual homeless or homeless couples. Step Up on Second affiliated with a Los Angeles-based developer, Shangri-La Industries, to engage in those conversions. That project progressed well. In March 2023, the facility opened, becoming what was, in the most straightforward of terms, one of the best examples of how a state/local public agency/private industry solution to the homeless problem could be applied and one of the first real successes of the Homekey program.
Unbeknownst to virtually everyone involved, however, a Shangri-La Industries employee, its then-28-year-old chief financial officer, Cody Holmes, had embezzled an estimated $40 million from the company, which resulted in Shangri-Las defaulting on the loans taken out to multiple construction projects for homeless shelters, including the Good Nite Inn in Redlands, one in San Bernardino, one in the City of King, one in Thousand Oaks and three in Salinas. As pertained to the Good Nite Inn conversion project, Shangri La received $30 million originating with the State of California passed along to it through the Department of Housing and Community Development and the City of Redlands but then defaulted on a $12 million private loan it obtained in June 2022 to purchase the motel.
While precisely how Holmes utilized all the money he diverted might never be tallied in detail, it is known that he used money flowing through Shangri L’s 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.
The fallout from Holmes’ action dealt a near-fatal blow to the concept of altruistic assistance to the homeless in the cities of San Bernardino, Redlands, Thousand Oaks, King, Salinas and elsewhere.  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.
It took tremendous effort, some skillful lawyering and intensified lobbying on the part of the City of Redlands to convince state officials that Redlands officials had not been the perpetrators of any fraud and that they were in fact victims whose admirable intentions and commitment had been egregiously betrayed and violated.
For months, Redlands officials sought to work with officials from Shangi-La Industries, who made a convincing case that they were, after all, Holmes’ victims, to see if the money Holmes had diverted could be recovered and the city’s financial obligations with regard to the financing of the conversion of the hotel satisfied. By Spring 2024, it was acknowledge that Shangri-La’s internal tracking and accounting mechanisms left much to be desired, based on the way Holmes suckered its corporate officials, and that Redlands’ recovery of the money Holmes had taken would be too long in coming, if ever, as the company had filed for federal bankruptcy protection. In April 2024, the City of Redlands ended its relationship with Shangi-La Industries.
Similarly, Redlands had placed a considerable amount of faith in the Santa Monica-based homeless services nonprofit Step Up. Redlands officials had brought Step Up in to manage the homeless services facility after it had been converted from a hotel. That facility put homeless individuals and couples into quarters that included a combined living room/dining room, kitchenette bedroom and bathroom. Step Up was affiliated with Shangri-La in a number of homeless residency projects, and was satisfactorily managing the Redlands facility. Nevertheless, its relationship with Shangri-La was a complicating factor. Step Up had been sued by the State of California along with more than a dozen other entities entangled in the Holmes debacle.
In May, the City of Redlands gave Step Up, which was in the process of discontinuing its homeless facility management operations, a 30-day notice of its intention to end its property management services arrangement with the company. Consequently, Step Up’s last day in the role of the property manager at the converted Good Nite Inn was June 30. The city had a temporary property manager fulfill that role over the last two-and-a-half months. This week, on Tuesday September 16, the Redlands City Council, after considering options charted by Redlands Homless Solutions Coordinator David Rabindranath, opted to contract with a Thousand Oaks-based nonprofit to take on property management responsibility at the Redlands municipal homeless residence operation.
Earlier this week, the Redlands City Council authorized entering into a one-year, $300,000 agreement with Many Mansions to oversee day-to-day operations, including assuming property management duties, at the former Good Nite Inn at 1675 Industrial Park Avenue.