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King City, population 14,000, wanted to show that even small towns can try to solve homelessness.
The Monterey County community last year partnered with Los Angeles-based developer Shangri-La Industries to land a grant from Homekey, California’s $3.1 billion program to help cities build affordable housing for their homeless residents.
King City and Shangri-La got $12.4 million to convert a motel into 44 units of permanent housing complete with social services — enough room for the city’s entire homeless population, said Mayor Mike LeBarre. The city expected the units to open by the end of 2022. But starting late last year, LeBarre said the renovations kept getting delayed.
Now the whole project may be in jeopardy. And the California Department of Housing and Community Development said this week it is investigating Shangri-La for program violations.
Shangri-La took out a loan for the conversion, which is now in default, according to filings in the Monterey County Recorder’s Office, putting the project at risk of foreclosure. The developer also failed to record an affordability use restriction — the legal language attached to a deed that guarantees the property remains affordable housing, LeBarre said.
Shangri-La this year defaulted on private loans in seven Homekey-funded motel conversion projects across the state, three of which are already housing homeless residents. On several of the projects, contractors have filed liens, alleging they weren’t paid.
And Shangri-La failed to record affordability restrictions in six of the projects, according to the California Department of Housing and Community Development, which said it is coordinating with the state Attorney General’s office in its investigation.
“We are aware of violations by Shangri-La Industries with respect to six of the seven Homekey properties for which it is the developer,” spokesperson Pablo Espinoza wrote in an email to CalMatters on Wednesday. “The state takes seriously any violations and is actively investigating this matter.”
In letters the department issued to the developer this month, officials alleged the lack of affordability restrictions, and the loans themselves (which made the projects collateral for lenders) violated program agreements with the state.
In an interview Thursday, Shangri-La CEO Andy Meyers said the state is partly to blame. He accused the housing department of taking months to approve the affordability agreements, a required step before the documents are recorded.
“The state has just taken forever to get these agreements out,” he told CalMatters.
Other problems with the projects have stemmed from that, he said. Projects are over budget, in part because Shangri-La has had to pay property taxes, when they would be eligible for abatements if the properties were recorded as affordable housing. Lenders also expected the affordability agreements to be recorded, causing some loan defaults on technicalities, he said. Meanwhile, he said, high interest rates the past two years have made refinancing difficult. The loan defaults were first reported this month by the real estate news outlet The Real Deal.
“There’s been no sense of urgency until there were these recent articles written about the loan defaults,” Meyers said of the housing department’s approving the agreements. “Then all of a sudden, HCD got really engaged and said, ‘We reached out to the Attorney General.’ I don’t give a s–t … I would love to go meet and work things out with HCD.”
Espinoza denied Meyers’ allegations, though one city appeared to back up the developer’s claim. In Thousand Oaks, a Los Angeles suburb, Assistant City Manager Ingrid Hardy told CalMatters in an email that the city and developer submitted an affordability agreement for a Homekey project to the state department in February, and only received approval to record it within the last week.
But Espinoza said the department couldn’t have approved the agreements after Shangri-La had already taken out the loans, and “absent their violation the recording would have been done in a timely manner.”
The department’s probe appears to be its first significant investigation into a private developer for the much-praised Homekey program.
The program — which gives cities, counties and local housing authorities money to build permanent housing for homeless residents — began in 2020 and has mostly funded hotel and motel conversions. Over the past three years, the housing department has granted $3.1 billion for 226 projects that, when all are completed, promise more than 14,000 units of affordable housing.
Shangri-La’s loan defaults throw the future of some of those projects into question. The housing department stressed in an emailed statement that the developer’s grants amount to just 3% of the total public dollars distributed through the program.
Meyers, meanwhile, said his company is committed to refinancing its loans and completing construction, which is halted on the four projects that haven’t yet opened.
“I’m going to find a way to get these projects done one way or another,” he said.
The delays have vexed local officials like LeBarre who were depending on the Homekey program to provide a significant number of affordable housing units, especially in small cities with otherwise limited services for the unhoused.
Like other local governments Shangri-La worked with, King City didn’t purchase the motel itself and has no ownership stake in it. Instead, the city acted only as a required co-applicant when the developer sought the state funds to acquire and renovate the property.
Now, the city is asking for state help to save the property from a possible foreclosure. And it has scrambled to keep dozens of unhoused residents in motel rooms temporarily, for months longer than planned. King City moved the residents from a creekbed encampment earlier this year, intending to soon move them into permanent units at the Shangri-La project, LeBarre said.
“We’re trying to find solutions of how to keep the project alive,” he said.
More than 200 miles south, the city of Thousand Oaks and Shangri-La won a $26.7 million Homekey grant in 2022 to convert a Quality Inn to 77 units of permanent housing. Shangri-La beat out three competing bids, according to a memo city officials prepared in the fall of 2021.
Thousand Oaks selected the developer for its “significant motel conversion experience,” and because the company had already picked out the property on its own. City officials also noted that Shangri-La’s prior Homekey-funded projects — in Salinas and San Bernardino — were “among the top 10 percent most cost-effective Homekey projects in California” and that the company would not need “any financial capital assistance from the city” to buy or renovate the hotel.
Still, Hardy, the assistant city manager, said the city also gave Shangri-La $1.8 million to help with construction. The project was supposed to open before the end of this year. But the developer has defaulted on a $10 million loan and contractors have also filed liens, according to Ventura County property records.
Construction is only 20% complete, Hardy said.
“The city is obviously extremely concerned and anxious to get this project back on track and resume construction so that we can house our most vulnerable residents,” she wrote. “Our community is relying on this project to serve people experiencing homelessness, especially considering this project was going to be the first of its size in East Ventura County.”
Shangri-La’s other projects were motel conversions in San Bernardino and Redlands that have both opened, and three in Salinas, where only one project has opened. In all its projects, the developer partnered with nonprofit Step Up on Second to provide services to residents.
Salinas and San Bernardino County officials did not respond to inquiries from CalMatters on Thursday. Step Up officials could not be reached for comment.
In Redlands, city spokesperson Carl Baker said an affordability agreement has been recorded. The property opened in January and is “basically fully occupied with approximately 120 residents,” he said.
But the project’s troubles aren’t over. This week Luxlion Industries, a company that provides fire safety services, filed a lien on the property.
CalMatters’ investigative reporter Lauren Hepler contributed to this story.
