One yr in the past, the Santa Monica-based homeless housing and providers nonprofit Step Up on Second Road appeared prefer it was about to grow to be a nationwide participant.
Collectively, Step Up and its associate, Shangri-La Industries, pulled in additional than $114 million to transform seven California motels into flats for previously unhoused tenants. By the summer season of 2023, Step Up was able to take that mannequin nationwide, with comparable initiatives lined up in North Carolina and Denver.
However getting the Homekey grants turned out to be the simple half. Whereas Step Up and its associate lined up enterprise elsewhere, the seven initiatives in California fell into debt. As an alternative of making tons of of badly wanted flats, the properties went into foreclosures and had been taken over by lenders. 4 stay empty and unfinished.
“It’s incredibly disappointing,” stated Philip Mangano, a longtime determine in nationwide homelessness coverage who labored as a marketing consultant for Step Up and beforehand served on its board of administrators. “To me, it’s a failing of national consequence.”
Mangano, who served as a “homelessness czar” for President George W. Bush, helped persuade politicians in California and throughout the nation that vacant motels might be an inexpensive, quick resolution to homelessness. He additionally helped Step Up capitalize on that imaginative and prescient, till its actual property partnership with Shangri-La Industries led to scandal.
In November 2023, Step Up and Shangri-La Industries backed out of a motel conversion in Fayetteville, N.C., telling metropolis officers it was not financially possible, a metropolis spokesperson confirmed.
Lower than two months later, in January, California Atty. Gen. Rob Bonta sued each Step Up and Shangri-La Industries in civil court docket over their Homekey initiatives, on behalf of the state Division of Housing and Neighborhood Improvement. The criticism alleged fraud and breach of contract, and demanded the return of greater than $114 million in grants. In a response filed Sept. 9, attorneys for Step Up denied the allegations and pointed a finger again at state officers for creating the scenario, in addition to different defendants.
Since then officers in Greensboro, Winston-Salem, Asheville and Wake County, N.C., have scrapped plans for motel conversions with Step Up and Shangri-La Industries, in accordance with Blue Ridge Public Radio. In April, officers with Denver’s Division of Housing Stability additionally terminated negotiations with Step Up on a resort conversion.
“I see the next 12 months as a stabilization period for Step Up,” its president and chief govt, Tod Lipka, stated in an interview with The Occasions in Might. “And to get past this, because everyone I’ve talked to who has been a partner with Step Up, they know we didn’t do anything wrong.”
Typically, Shangri-La Industries dealt with acquisition, financing and development on housing initiatives, Lipka stated, whereas Step Up offered tenant providers and property administration on the accomplished buildings. The foreclosures stemmed from personal loans that Shangri-La Industries took out along with the state grants.
For instance, in Ventura County, Shangri-La Industries obtained $26.7 million in Homekey funds to transform a 78-room motel in Thousand Oaks, state information present. That was presupposed to cowl the acquisition, renovation and a few working prices. Nevertheless, in accordance with property information, the corporate then borrowed greater than $10 million for the undertaking from personal lenders. It then defaulted on these loans. One of many lenders, Qualfax, foreclosed and took possession of the property in March.
At present, the previous High quality Inn & Suites Thousand Oaks sits vacant and incomplete. It’s unclear when the property will grow to be inexpensive housing, if ever, or the place the $26.7 million in state funds went.
In a lawsuit pending in Los Angeles County Superior Courtroom, Shangri-La Industries has accused its former chief monetary officer, Cody Holmes, of embezzling housing cash and spending it on private extravagances, together with tickets to the Coachella Valley Music and Arts Pageant, jewellery and lease for a Beverly Hills mansion. Holmes, via his legal professional, declined to remark.
“Eeveryone I’ve talked to who has been a partner with Step Up, they know we didn’t do anything wrong,” stated Tod Lipka, president of Step Up On Second.
(Luis Sinco / Los Angeles Occasions)
Lipka advised The Occasions in Might that he didn’t learn about Shangri-La Industries’ defaults till late final yr, solely weeks earlier than Bonta hit each firms with a lawsuit.
“In all of our development relationships, we expect our partner to handle the financial side of it,” Lipka stated. “And we do expect to get updates, but that’s not our forte.”
Step Up has been a well-respected Los Angeles space nonprofit for many years. However some former insiders who’ve labored for or with Step Up say that throughout the coalition-minded homeless housing business, Lipka has a popularity for doing issues his personal method.
“I was shocked but not surprised,” stated one affordable-housing developer who has partnered with Step Up previously, about listening to of its involvement within the Homekey scandal.
Based in 1984 by advocate Susan Dempsay, Step Up began as a scrappy group based mostly out of a former retail retailer and warehouse in Santa Monica. In its early days it offered a supportive gathering place for individuals with psychological sickness, providing dialogue teams, video games comparable to pool and pingpong, low cost garments on the market and a small library.
The group opened its first housing improvement a decade later. In Might, Lipka stated that after taking up the group in 2001, he realized that numerous the group’s shoppers had been struggling to search out inexpensive housing.
“We had hundreds of people every day coming in who did not have housing and nobody wanted to house them,” he stated. Nevertheless, he grew to become pissed off by the sluggish and cumbersome strategy of conventional everlasting supportive housing improvement.
“We started to look at models to scale housing faster and more quickly,” Lipka stated. “And part of that was looking at, how do you bring in private investment?”
That quest ultimately led Step As much as associate with the for-profit Shangri-La Industries. Based mostly in downtown L.A., Shangri-La Industries is an offshoot of Shangri-La Leisure, a corporation began by the late philanthropist and movie producer Stephen Bing.
Shangri-La Industries had labored as a contractor on industrial initiatives, together with upscale resort renovations. Its then-CEO, Andrew Meyers Abdul-Wahab, stated in a 2021 webinar that after assembly Lipka he was drawn to work collectively, regardless of having by no means performed inexpensive housing earlier than, due to a “passion for people” and what he noticed as a novel enterprise alternative.
Earlier than Homekey, Shangri-La Industries and Step Up partnered on different initiatives together with 4 in Los Angeles utilizing funds from the town’s $1.2-billion Proposition HHH homeless housing bond and accomplished the initiatives as promised.
Of these 4, two had been motel conversions, which turned out to be a fortuitous area of interest.
Gov. Gavin Newsom speaks a Mission Homekey web site in Los Angeles in August 2022. The undertaking was designed to provide grants to purchase inns or motels and renovate them into homeless housing.
(Brian van der Brug / Los Angeles Occasions)
Collectively, the partnership of Step Up and Shangri-La Industries grew to become one of many high recipients of Homekey, receiving greater than $114 million for seven initiatives in San Bernardino, Monterey and Ventura counties. In utility supplies despatched to the Division of Housing and Neighborhood Improvement, which oversees Homekey, Shangri-La Industries boasted of being a “financial powerhouse.” Meyers even wrote that he might personally commit as much as $275 million to make sure the initiatives’ solvency. Step Up, for its half, wrote that its earlier work “was an early genesis” for your complete Homekey program.
Between 2020 and 2023, Step Up grew to 450 workers from 314, in accordance with its tax filings, as annual revenues climbed from about $23 million to $46.7 million. It and Shangri-La Industries started lining up motel conversions in different states, thanks partly to introductions by Mangano.
“Part of the idea was, if we can figure out a way to make this work in North Carolina…anybody in the country would believe that they could do it,” Mangano stated. “It would have national implications.”
Tod Lipka in April 2009, within the inside courtyard of the newly constructed Step Up On fifth residence constructing in Santa Monica.
(Genaro Molina / Los Angeles Occasions)
Lipka advised The Occasions he was pushed to increase as a result of he views Step Up’s work as “lifesaving.”
“It’s a moral obligation that we do as much as we can to help people and help communities that ask us to do that,” Lipka stated.
In line with a number of individuals who have both labored intently with or for Step Up, Lipka additionally appeared to benefit from the high-flying life-style of Shangri-La Industries executives comparable to CEO Meyers, a onetime NFL participant who generally took personal jets to out-of-town engagements.
“Tod got high off flying in Andy’s private jet,” stated one insider who labored intently with Lipka round that point and nonetheless works within the homeless housing sphere. “The organization was overextended, enamored of growth everywhere.”
Someday after partnering with Shangri-La Industries, Lipka upgraded from a modest automobile to a Mercedes-AMG, leased by Step Up, in accordance with a number of former workers. Then, to a BMW 8 Sequence. Some individuals within the group stated they on the time discovered the flashiness unseemly for the pinnacle of a homelessness nonprofit.
Lipka dismissed that criticism. “I have a car allowance,” he advised The Occasions. “I have a fixed allowance and the organization pays for that, and anything over and above I pay personally for.” His automobile allowance, he estimated, is about $1,350 monthly.
“My focus has always been on the mission, and everything I do is aligned with trying to accomplish that mission,” he stated.
Step Up ran right into a money crunch in late 2022 and turned to Shangri-La Industries for an infusion, in accordance with U.S. Chapter Courtroom filings and interviews with a Shangri-La Industries legal professional. The Occasions reported in June that Step Up, at its personal request, organized to promote its share of any future earnings from the Homekey initiatives to Shangri-La Industries for $2.7 million. The corporate’s attorneys declare in chapter filings that the funds got here from funds supposed for a housing undertaking in Salinas. Lipka advised The Occasions he didn’t know that and wouldn’t have accepted the transaction if he had.
Chapter Courtroom proceedings reveal different funds not beforehand reported on.
In line with an settlement between Shangri-La Industries and Step Up, referenced in court docket paperwork and obtained by The Occasions, Mangano and his Boston-based nonprofit, the American Roundtable to Abolish Homelessness, or ART, can be paid for his advocacy on sure Homekey initiatives as much as a complete of $100,000 per property.
When requested precisely what advocacy he offered, Mangano stated that the funds had been organized as a result of “I had done a lot of work with Step Up over the years” — for instance, serving to with board technique and build up a nationwide profile. “I didn’t really get any money for that,” Mangano stated. “Tod said, ‘If I ever come into a situation where I can repay you, I will.’ He cut me into the developer fees.”
A tax submitting for the fiscal yr ending in December 2022 exhibits that ART obtained $226,500 from Step Up. It additionally exhibits that Lipka joined ART’s board of administrators that yr, and obtained a $149,000 mortgage from ART for “program service revenue receivables.”
On high of being named as a defendant in that litigation and shedding offers in different states, Step Up additionally noticed its exterior accountants give up after Bonta filed the state lawsuit, Lipka confirmed. Their departure delayed the group from submitting the annual monetary audits required by the Inner Income Service for all nonprofits — and key to fundraising. He stated that Step Up is cooperating with the legal professional common’s workplace and isn’t in search of any new improvement offers.
“Right now, we’re not going to take any new partners,” Lipka stated. “We’re going to be more careful in the future about anybody we take on as a partner.”
Scott is a particular correspondent. Occasions employees author Doug Smith contributed to this report.
