Step Up on Second Lawsuit: $114M Fraud, Shangri-La CFO Case

The Step Up on Second lawsuit is a civil action California Attorney General Rob Bonta filed on January 9, 2024, in Los Angeles County Superior Court, naming the Santa Monica nonprofit alongside developer Shangri-La Industries and others, and seeking the return of more than $114 million in Project Homekey grant funds tied to seven failed motel-to-housing conversions.¹ The case is pending. Step Up denies wrongdoing.

What the State Is Alleging

The complaint was filed by Bonta on behalf of the California Department of Housing and Community Development. It names Shangri-La Industries, Step Up on Second, several local government co-applicants on the Homekey grants, and Shangri-La’s private lenders.¹

The state’s core theories are contractual fraud, breach of contract, and failure to record required use restrictions:

Shangri-La allegedly misrepresented its finances and should not have needed money beyond the state grants to buy the motels and complete construction.¹
Shangri-La took out private loans against all seven properties without state approval, violating Homekey contract terms that required prior authorization and the recording of affordability restrictions before any borrowing.¹
Deed restrictions guaranteeing the properties would remain affordable housing were never recorded on six of the seven sites.¹

Beyond the money, the state asked the court to appoint a receiver over the properties and to order local governments to record the missing use restrictions. Ryan Seeley, general counsel for the housing department, said “Shangri-La has misrepresented multiple financial considerations and has yet to cure a number of breached contractual obligations.”¹

Why Step Up Is Named

Step Up on Second was Shangri-La’s nonprofit partner on the seven Homekey projects in San Bernardino, Ventura, and Monterey counties. The projects were designed to produce roughly 500 permanent housing units for formerly homeless residents, and together they drew more than $114 million in Homekey grants.¹² Step Up’s stated role was as the service provider handling on-site supportive services, while Shangri-La handled acquisition, financing, and construction. When Shangri-La defaulted on the private loans it had placed against the properties, all seven entered foreclosure.

Step Up’s Response

Step Up filed its response on September 9, 2024, denying the allegations and attributing the financial failures to state officials and other defendants. President and CEO Tod Lipka has said the nonprofit did not know about Shangri-La’s loan defaults until late 2023 and had no role in handling Homekey funds, acquiring the properties, or arranging financing. “Everyone I’ve talked to who has been a partner with Step Up, they know we didn’t do anything wrong,” Lipka told the Los Angeles Times.²

Before the Homekey partnership fell apart, Step Up and Shangri-La had completed four housing projects together in Los Angeles funded by the city’s $1.2 billion Proposition HHH bond.²

The $2.7 Million Payment

A separate thread that complicates Step Up’s service-provider defense involves a $2.7 million payment the nonprofit received from Shangri-La. In late 2022, as Shangri-La faced cash shortages, Step Up agreed to sell its share of future profits and developer fees from the seven Homekey projects to the developer. The total buyout was set at roughly $3.6 million, and Shangri-La made two of three scheduled payments between November 2022 and January 2023.³

Court records later showed the $2.7 million Shangri-La actually paid came from loan proceeds that were supposed to fund a Homekey construction project in Salinas. Lipka said he believed the money came from Shangri-La’s existing funds and that he would not have approved the deal if he had known its true source.⁴

The buyout itself indicates Step Up had an economic interest in the projects beyond services. Court documents described potential future profit participation of 15% to 25%. Edwin W. Leslie, a court-appointed receiver overseeing four of the Monterey County projects, said in a February 2024 report that Step Up may have received more than $20 million from state, city, and county agencies tied to the Homekey properties. Lipka disputed that figure, saying he had “no idea where he got that number from.” Leslie also said Step Up had not cooperated with requests for financial records; Lipka rejected that characterization, telling the Los Angeles Times that the nonprofit had “complied with all requests for information” and often did not have the documents being sought.³

Because Shangri-La is in financial disarray, creditors could attempt to claw back the $2.7 million Step Up received.⁴

What Happened to the Housing

All seven projects entered foreclosure after Shangri-La defaulted on its private loans. As of late 2024, four of the seven remained empty and unfinished, and only three had ever opened to tenants.²

The Thousand Oaks project, a 78-room former Quality Inn funded with $26.7 million, was foreclosed on in March 2024 after construction halted at around 20% completion. It sat vacant and, according to local officials, was damaged by rain and mold.²⁵ The King City project in Monterey County received $12.4 million and opened in March 2026 only after 10 separate deals totaling $16 million were assembled to revive it.⁶ The Redlands project, funded with about $30 million, opened in early 2023 with 132 formerly homeless residents, but contractors filed more than $2 million in mechanic’s liens for unpaid work. On April 16, 2026, the Redlands City Council voted unanimously to terminate its contract with Shangri-La and continue working directly with Step Up to keep residents housed.⁷

Related Criminal Case Against Shangri-La’s Former CFO

The state civil suit against Step Up is separate from federal criminal proceedings, but readers often conflate them. On October 16, 2025, federal prosecutors arrested Cody Holmes, Shangri-La’s former chief financial officer, on a mail fraud charge that carries a maximum sentence of 20 years.⁸⁹ Holmes is presumed innocent until proven guilty.

Shangri-La CEO Andy Meyers has pointed to Holmes as the architect of the fraud. No criminal charges have been reported against Meyers or against Step Up on Second or Tod Lipka.¹⁰¹¹

Where the Case Stands Now

The state civil suit against Step Up on Second remains pending. As of late 2024, no trial date, summary judgment ruling, or settlement had been reported.² Shangri-La’s attempt to move four of the projects into Chapter 11 bankruptcy was dismissed by U.S. Bankruptcy Judge M. Elaine Hammond, who ruled the filings were made in “bad faith” and constituted “an unfair manipulation of the bankruptcy code,” noting that Step Up, as the nonprofit partner responsible for operating the facilities, had not authorized them.¹²

Step Up has described itself as being in a “stabilization period.” It has stopped taking on new development partners and is not pursuing new development deals. Its outside accounting firm resigned after the state filed suit, delaying mandatory annual financial audits. Lipka remains CEO, and no formal accountability proceedings against him individually have been reported.²

1
CalMatters. California Homeless Housing Lawsuit
2
Los Angeles Times. Nonprofit Helped Conceive California’s Homeless Housing Program, Then Left String of Failed Projects
3
Yahoo News. $2.7 Million Meant to Build Housing
4
Los Angeles Times. Homeless Services Provider Received Funds From Disgraced Developer Meant for Housing
5
The Acorn. Many Mansions Proposes Solution for Failed Homeless Shelter Project
6
CalMatters. Newsom Homekey Records
7
Community Forward Redlands. City Council Terminates Contract With Shangri-La Industries
8
U.S. Attorney’s Office, Central District of California. Beverly Hills Man Arrested, Brentwood Man Charged in Separate Criminal Cases Linked to Fraud
9
Beverly Press. Beverly Hills Man Accused of Misusing Homelessness Funds
10
New York Post. Shangri-La Homeless Scam Looms Over Newsom Donations
11
Mar Vista Voice. Federal Prosecutors Charge Two Los Angeles Developers in Homeless Housing Fraud Cases
12
Ventura County Star. Bankruptcy Thrown Out for Developer of Thousand Oaks Homeless Project