California’s state housing department is suing a Los Angeles developer that last year defaulted on private loans it took out on seven state-funded motel conversions, putting the homeless housing projects at risk of “imminent foreclosure.”

The suit — filed Tuesday last week in Los Angeles County Superior Court by Attorney General Rob Bonta on behalf of the California Department of Housing and Community Development — seeks to claw back $114 million in state grants that Shangri-La Industries received during the pandemic from the department’s celebrated Homekey program

The $3.1 billion program gives local governments grants to convert motels or build new permanent housing for unhoused Californians.

In addition to Shangri-La, the lawsuit names as defendants the cities that applied with the developer to get the grants, the nonprofit Step Up on Second that was to provide services at the housing units and the developer’s private lenders.

The seven projects for which Shangri-La won the grants — in San Bernardino, Ventura and Monterey counties — were supposed to result in a total of 500 permanent housing units, complete with social services, for homeless residents.

As CalMatters reported last month, the projects are now in jeopardy, straining several small cities that were depending on them to provide a significant number of housing units in areas otherwise short on services for the homeless.

Three of those properties were already housing formerly homeless Californians as of last December, when the department began investigating the developer for alleged violations of its contracts with the state.

Shangri-La had taken out private loans on all seven of its projects and then defaulted on them, putting the motels in danger of foreclosure, CalMatters and other media outlets reported at the time. Shangri-La’s projects were also the subject of several liens filed by contractors alleging they hadn’t been paid.

The department was apparently unaware the developer had borrowed against the motels. In December the state sent letters to the developer calling the loans a breach of its contracts, and also took issue with Shangri-La’s failure, in six of the properties, to record use restrictions — the legal language attached to deeds that guarantee properties remain used for affordable housing. 

The state, in its lawsuit, accuses Shangri-La of contractual fraud, writing that the developer should not have needed additional funds beyond the grants to buy the motels and complete the projects.

The department is asking the court to appoint a receiver to handle the properties going forward. It’s also seeking a court order for the projects’ local governments to record use restrictions on the properties.

Problems ‘of their own making’

Shangri-La has not yet responded to the suit in court. CEO Andy Meyers could not be reached for comment by email today, and his phone number appears to have been disconnected since December. 

Last month in an interview with CalMatters, Meyers blamed the state for being slow to approve the projects’ affordability restrictions and said that, along with a cascade of other construction challenges such as high interest rates, caused the defaults. He said “I don’t give a s–t” that housing officials had contacted the attorney general, and added he was still planning to finish the projects.

In a statement last week, the housing department’s general counsel Ryan Seeley said Shangri-La’s problems “are of their own making.”

“Shangri-La has misrepresented multiple financial considerations and has yet to cure a number of breached contractual obligations to the state and the Homekey program,” he said.