City council terminates contract with Shangri-La Industries, the developer for Redlands homeless housing project

REDLANDS, Calif. — City council voted unanimously during their April 16 meeting to terminate a contract with Shangri-La Industries and Step Up on Second Street, Inc. for a breach in agreement involving Redlands’ permanent supportive housing project, Step Up in Redlands. 

Why it matters: Step Up in Redlands, located at 1675 Industrial Avenue, provides supportive housing to approximately 130 residents, most of whom were previously homeless. Shangri-La, the project's developer, defaulted on several loans connected to the property and breached additional agreements, prompting the city to take action and break the contract. However, this leaves Step Up's future uncertain.

Details: In March of 2022, the California Department of Housing and Community Development (HCD) awarded Redlands, along with its partners Shangri-la Industries, a for-profit developer, and Step Up on Second Street grant funding of about $30 million under the Homekey Program to renovate 98 motel rooms. 

Shangri-La also worked on Homekey housing developments in San Bernardino, King, Salinas and Thousand Oaks and in total received over $100 million in funding from HCD to buy and renovate hotels in California to address housing needs for those who are currently or at risk of homelessness. 

The grant agreement between Shangri-La and Redlands required the city to provide a matching contribution and commit over $3 million in project funding to be disbursed directly to Shangri La in seven annual payments. The Step Up in Redlands facility opened successfully and was occupied by February of 2023. 

Since the start of the agreement, the city made two annual payments of $510,497 to Shangri-La, expending a total of $1,020,994 from the operating subsidy, according to the City Council staff report.

Funding for the project, including the HCD's grant money, the city's operating subsidy, and other funding sources secured by Shangri-La, was initially expected to last at least five years.

The city, however, discovered that Shangri-La had at least seven different contractual defaults and sent the developer a notice in November of 2023 demanding the defaults be cured. 

California’s attorney general filed a lawsuit on Jan. 8, 2023 alleging that Shangri-La “sought to take advantage” of the state’s Homekey program. The lawsuit claims that the business violated multiple terms and conditions of the agreements, including conveying the property titles to a shell company, failing to pay the debt on the property, using the property as collateral for loans without permission and failing to pay contractors. 

Redlands, along with the other cities who partnered with Shangri-La, were named as defendants in the lawsuit. 

What they’re saying: “This doesn’t change our operating subsidy or our commitment to the project, that will continue to be allocated per the Homekey 2 agreement,” said Redlands Assistant City Manager Chris Boatman about the decision to terminate the contract. “But it gives the city full control to ensure that money is spent appropriately and towards operational expenses.” 

Moving forward: The move to break the contract was recommended by staff so that the city would not have to pay Shangri-La the annual amount of $510,497 as part of their matching contribution. Now that their relationship with Shangri-La has officially come to a close, the city will work directly with Step Up to ensure that the funds go towards supporting the operation of Step Up in Redlands.

Breaking the grant agreement will not alter the city’s obligations to the HCD, meaning funds will continue to be disbursed on an annual basis until the full balance is spent.

Redlands and HCD are working together to find a permanent solution so that Step Up in Redlands can continue to provide services and housing to residents.