Redlands converted motel for the homeless still hasn’t passed fire and building inspections

Nearly 18 months after Redlands began housing homeless residents at the former Good Nite Inn with millions of dollars from a state-funded program, the former motel still hasn’t passed fire and building inspections, according to a court document.

Due to those deficiencies, the converted motel — now called Step Up in Redlands — is still operating on a temporary occupancy permit, according to a declaration filed in U.S. bankruptcy court May 3 by Mitch Vanneman, the court-appointed receiver for the property.

Vanneman became the receiver of the now-foreclosed property in December 2023 after Los Angeles developer Shangri-La Industries defaulted on a $12 million private loan it obtained in June 2022 to purchase the motel, despite having received $30 million from the state three months earlier for that purpose. The state funding included $4.8 million to provide onsite services to the homeless and/or to subsidize rent payments by tenants.

Much still needs to be done

Although renovation of the motel was substantially completed by the time Vanneman became receiver, he said an inspection of the property revealed numerous tasks — “punch list items” — that still needed to be completed before the fire marshal and building inspector could sign off, according to his declaration.

Among the deficiencies are a sidewalk at the property entrance that is not compliant with the Americans with Disabilities Act, a lack of handrails, fire alarms that need to be reinstalled, and electrical outlet coverings that need to be replaced, according to the declaration.

“Additionally, throughout the course of the receivership there have been plumbing and electrical issues within dwelling units and the main office, due to construction completed prior to tenants’ move in, that require mediation,“ Vanneman said.

He filed the declaration in an effort to block Shangri-La’s request for Chapter 11 bankruptcy protection, which a federal bankruptcy judge rejected in separate rulings on May 15 and June 5.

Funds unaccounted for

Vanneman said he is still trying to determine what happened to total of $5.8 million provided to Shangri-La by the state and the city of Redlands. The funds were supposed to be used to pay for onsite services at the former Good Nite Inn and/or to subsidize rent payments by tenants.

“To this date, those funds are unaccounted for and were not in the borrower’s bank account upon receivership appointment,” Vanneman said in his declaration.

In May, only 15 of 98 tenants at Step Up on Second had housing vouchers to cover their $1,280 monthly rent, while 29 paid less than $490 a month and 53 residents had no income and therefore were not paying rent, according to Vanneman.

Step Up on Second, the Santa Monica-based nonprofit that partnered with Shangri-La on the motel conversion projects to provide onsite services to the homeless, is still owed $1.5 million, said Tod Lipka, Step Up’s president and CEO.

In November 2022, Lipka said Step Up sold its interest in future profits on the Homekey projects to Shangri-La for $2.7 million to cover operating expenses at Step Up in Redlands, which opened in January 2023, and Step Up in San Bernardino, which opened in March 2023.

Lipka said the money also was used to fund various projects it had on the books in California and Georgia throughout 2023.

Homekey launched during pandemic

Gov. Gavin Newsom launched the Homekey program in June 2020 to protect the unhoused from the threat of the coronavirus pandemic.

Step Up also partnered with Shangri-La on five other Homekey motel conversion projects in Thousand Oaks, Salinas and King City, but those projects failed to materialize. Only Step Up in Redlands and Step Up in San Bernardino are fully operational and housing formerly homeless tenants.

As of Wednesday, June 19, Step Up in Redlands was at or near 100% capacity, city spokesperson Carl Baker said.

Target of litigation

Shangri-La now is mired in a spate of litigation involving the state Department of Housing and Community Development and various lenders and contractors.

Problems began surfacing for Shangri-La last year, when a Southern California News Group investigation revealed that contractors on the Redlands and San Bernardino Homekey projects filed more than $2 million in mechanics’ liens over unpaid work on those projects.

It later was revealed that dozens of liens totaling millions of dollars had also been filed at recorders’ offices in Ventura and Monterey counties by contractors and lenders that were not paid for Homekey-funded projects in those areas

In a 321-page lawsuit filed in January in Los Angeles Superior Court, the state Housing and Community Development Department sued Shangri-La, alleging the developer breached its obligations under terms of its agreements with the Homekey program.

The state alleges Shangri-La, after receiving more than $114 million in Homekey funds from the state, granted and recorded deeds of trust on the seven motel properties to secure loans from third-party lenders without first obtaining the state’s written authorization, as required under the Homekey agreements.

Shangri-La then defaulted on the loans, causing the lenders to begin the foreclosure process, according to the state’s lawsuit. Additionally, the state alleges that for six of the seven motel properties, Shangri-La and its partner agencies failed, in timely fashion, to record use restrictions on the motel properties to ensure they would be used solely for interim or permanent housing for the homeless for up to 55 years.

The next hearing on the case is scheduled for July 1.

In April, the city of Redlands terminated its Homekey agreement with Shangri-La. Assistant City Manager Chris Boatman said at the time that the city will continue to provide $510,000 annually as an operating subsidy to house the homeless at the motel, but now only the city will have full control to ensure that money is spent appropriately and toward operational expenses

Attorney: Shangri-La still viable

Brian A. Sun, an attorney representing Shangri-La, said Wednesday, June 19, that the developer is still pushing to complete all its Homekey projects, but it will entail restructuring and refinancing each of them.

Although Redlands terminated its agreement with the developer, Sun said the city previously worked well with Shangri-La in the past, and hopefully will consider working with the developer again on new strategies to save the project. That may include bringing in new investors interested in distressed properties.

“We are committed in trying to come up with plans to get these projects done in the manner in which they were envisioned,” Sun said. “We think that potential is still there, if we can herd all the cats.”