Shangri-La’s Project Homekey motel in Salinas heads to receivership

One of Shangri-La Industries’ Project Homekey developments is headed to receivership after the firm defaulted on loans tied to the Salinas site earlier this year. 

A Monterey County Superior Court judge last week ruled to appoint a receiver for 1030 Fairview Avenue in Salinas, according to a court filing. Edwin Leslie-Kubat at LK Asset Advisors was named as the receiver. 

The appointment of a receiver comes after contractor Johnson Electronics sued Shangri-La in August, asking the court to foreclose on a mechanic’s lien tied to the site, a motel slated for conversion into housing for the homeless under the state’s Project Homekey, according to a court complaint. 

After Shangri-La Industries defaulted on a loan tied to the same project in November, one of its lenders, a successor to original lender Sunday Capital, filed a cross-complaint, asking the court to appoint a receiver on the development. 

The receivership will “help us sort out the issues that are affecting this project,” Phillip Hosp, an attorney for the new lender on the project, said in a statement. 

Shangri-La has defaulted on loans tied to seven hotels slated for Project Homekey conversions over the last six months, according to property records and county notices of default. All seven received state grants — worth a cumulative $121 million — to help support the conversions. 

The grants represent about 3 percent of the total handed out under Project Homekey, according to the state’s Housing and Community Development Department.

A receiver has the power to collect all rent, revenues, incomes and profits from the property and employ a property manager to help with accounting, financial reporting and renovations, among other powers.

It is also authorized to sell the property, putting the site’s future in flux. 

At 1030 Fairview, Shangri-La scored $13.3 million in state grants in 2021, as part of its second Project Homekey funding round, according to HCD data. The project, formerly the Salinas Inn, was designed to house 100 people. 

Shangri-La CEO Andy Meyers laid blame on the state for the defaults, saying its lenders required an in-place regulatory agreement on the projects. 

However, Meyers claimed HCD did not sign regulatory agreements, putting Shangri-La in default and meaning the firm was subject to property taxes, rather than affordable housing tax abatements. 

“It has caused us millions of dollars in damages,” Meyers said. “It throws the financials for us.” 

“We deny that,” said Pablo Espinoza, a representative for HCD. “Their breach of contract led to this.” 

Espinoza said Shangri-La changed the ownership structure on a number of projects without obtaining prior approval from HCD, leading to a breach of contract. 

Meyers said many of the developments have seen “tens of millions of dollars in overages,” adding the increased expenses were out of the firm’s control.