Ramada developer sued by California Attorney General. What does this mean for Asheville?

ASHEVILLE - Mayor Esther Manheimer said the city will not be spending $1.5 million for three years of supportive services at a homeless housing conversion in East Asheville.

Namely, she said, because there is no project there to fund. In the last several months, following a slew of litigation, developer Shangri-La defaulted on a $6.3-million loan and lost the Asheville property.

Shangri-La Industries, a for-profit, California-based company, made promises to transform the former Ramada Inn property into 113 units of permanent supportive housing for the city's homeless population. Shangri-La was overseeing construction and Step Up, a nonprofit, also based in California, was responsible for lease-up, supportive services and property management.

“There is nothing to move forward with," Manheimer told the Citizen Times Jan. 9. "The city’s partnership with Step Up was contingent on this project being built and there being housing and residents to provide services to. Since that’s not happening, it’s made that agreement moot, essentially.”

Further escalating Shangri-La's legal troubles is a complaint filed Jan. 8 by California's Attorney General on behalf of the California Department of Housing and Community Development.

Shangri-La Industries owns seven motels in California that are supposed to be converted to permanent supportive housing for homeless people. Under California’s Project Homekey, the state awarded Shangri-La $114 million to buy and renovate those properties, according to reporting by by the Ventura County Star, part of the USA TODAY network.

The state’s lawsuit, filed in Los Angeles County Superior Court by Attorney General Rob Bonta's office, accuses Shangri-La and its partners of violating the terms of their agreements with the California Department of Housing and Community Development. The suit also alleges violations of federal regulations, since much of the Project Homekey money came from the federal government’s pandemic relief programs.

The state is seeking the return of Shangri-La’s Homekey money as well as court orders that would stop foreclosure proceedings and guarantee that the properties be used for affordable housing. That guarantee would apply to future owners of the properties, should they be sold or foreclosed upon, the Ventura County Star reports. The lawsuit also asks the court to appoint a receiver to oversee each Shangri-La property.

More: California's attorney general sues developer of stalled Thousand Oaks homeless housing

What about the $1.5 million?

The city of Asheville was initially under contract to purchase the former motel property, intending to transform it into a permanent high-access shelter, but it abandoned plans in December 2021. It authorized the assignment of its contract to purchase the property to Shangri-La, which announced it would convert the property into homeless housing, in partnership with another California-based company and nonprofit, Step Up Inc.

Step Up is also named in the California lawsuit.

The decision was approved in a 6-1 vote, with council member Antanette Mosley the sole holdout.

At the time, Mosley cited concerns about equity and transparency. While a request for proposal process was not necessary to pursue a new project at the Ramada — which was confirmed Jan. 9 by City Attorney Brad Branham — she said it would have been a more transparent process.

Mosley declined to comment further Jan. 9.

In December 2021, at the same meeting where it assigned the Ramada contract to Shangri-La, City Council authorized City Manager Debra Campbell to enter into a funding agreement with Step Up in the amount of $1.5 million, or $500,000 annually, for three years of supportive services for people housed at the project once it opened.

Branham said no action is required to terminate any agreement with Step Up, "because no such agreements exist."

"The City would only act on that authorization, and execute an agreement, when and if Step Up could actually provide the service. This has not occurred," Branham said.

"In light of recent events, it is possible that the City may not contract with Step Up after all. However, because no agreement is in place, nothing needs to occur to terminate the relationship. Nor does the City have any current responsibilities to Step Up or any other party with regard to the redevelopment of this site."

If the $1.5 million is needed for an "alternative purpose," Branham said, it can be reallocated by a new action of council.

Since the city pivoted from its property purchase plans, its only financial stake in the project was the waived reimbursements of $79,500 in due diligence costs that Shangri-La had previously agreed to pay them, Manheimer said.

A similar story elsewhere

The lawsuit is one in a series of missteps and litigation faced by the developer. After Shangri-La defaulted on its $6.3 million loan, the property was foreclosed on by lender Stormfield Capital. In December, a default judgment was granted against the developer after contractor Beverly-Grant alleged nonpayment for its work done at the property.

Reporting by the Ventura County Star details a similar story elsewhere: after breaking ground last year on 77 permanent supportive housing units as part of a hotel conversion in Thousand Oaks, California, the project is still mid-renovation.

Shangri-La hasn’t paid some of its subcontractors and has defaulted on nearly $12 million in loans on the property, and foreclosure looms if the company doesn't catch up on payments, according to a Dec. 15 story from the Ventura County Star.

The Quality Inn & Suites conversion is one of seven motel renovation projects Shangri-La is working on under California's Project Homekey program. Two of them are completed and tenants have moved in.

Six of the seven have “apparent violations” of Shangri-La’s contracts with the California Department of Housing and Community Development, per the Ventura County Star's December reporting. According to the lawsuit filed in January, all seven Homekey properties are "at risk of imminent foreclosure."

More: Thousand Oaks homeless housing project in limbo as developer faces suits, foreclosure

More: East Asheville Ramada Inn property slated for homeless housing lost to foreclosure

Sarah Honosky is the city government reporter for the Asheville Citizen Times, part of the USA TODAY Network. News Tips? Email shonosky@citizentimes.com or message on Twitter at @slhonosky. Please support local, daily journalism with a subscription to the Citizen Times.

This article originally appeared on Asheville Citizen Times: Ramada developer sued by California AG. Asheville homeless shelter?