An extra $454,481 goes missing from Petaluma's Theatre District development

Last May, we reported in these pages that Basin Street Properties not only went $10 million over budget redeveloping Petaluma’s Theatre District, but left the city to pick up the tab.

Now, new information has surfaced showing that Basin Street Properties cannot account for nearly half a million dollars from the city of Petaluma, and, despite documented attempts by the city to recover the $454,481, it remains on the books as a “donation.”

The problem began when the city hired Basin Street Properties, an investment company based in Reno, to oversee such public infrastructure as sidewalks and sewers in the privately owned project. Basin Street contracted with local company North Bay Construction for this work.

But the contract was tainted at its inception by a major conflict of interest: The owner of North Bay Construction, John Barella, is the largest single investor in Basin Street. In a court filing, Barella admitted this year that he and Basin Street are “considered the same.”

Public records show that within just a few months, Theatre District construction costs soared 150 percent over budget—sucking up $5 million that had been slated for fixing potholes and sewers and improving Petaluma’s decrepit waterfront.

Then, in 2005, Basin Street was instructed by city officials to return an overcharge of nearly half a million dollars. But Petaluma City Attorney Eric Danly says he has no record of the repayment. Nor can Danly locate hundreds of pages of invoices submitted to city officials by Basin Street to justify payment of its $17 million bill.

In August 2003, the Petaluma City Council voted that the proposed Theatre District project would pose no environmental problems. This resolution defied substantial evidence that the construction site had been heavily polluted by gasoline and diesel fuel hydrocarbons for decades. Additionally, the city’s environmental consultant had warned the city that underground construction would likely require “special handling of soil and groundwater.”

In January 2006, the city council amended the $7.5 million development agreement with Basin Street and pumped another $4.8 million into the downtown project. The huge increase covered remediation of what city manager Mike Bierman said were “unforeseen” underground hazardous wastes on the public portion of the project. The resolution also instructed Basin Street to pay back $704,481 it had improperly charged the city for remediating a plume of toxic waste located on land owned by Basin Street itself.

On February 2, 2006, Basin Street issued a check for $250,000 to the city in partial repayment.

On May 17, 2006, the director of public works, Vince Marengo, reminded Bierman that Basin Street still owed the city $454,481 “to cover costs of contaminated and hazardous materials encountered on the infrastructure project whose source resided on Basin Street owned property.” But instead of writing another check, Basin Street cut an unusual deal with Bierman. Under the arrangement, Basin Street would give the $454,481 directly to North Bay Construction, thus paying for construction work that the city would otherwise have had to cover.

In effect, Basin Street issued a $454,481 credit to the city which it could then apply to work performed by North Bay—although the nature of this work was unspecified.

On October 10, 2006, Marengo told Bierman that the city needed “confirmation of Basin Street’s total payments to North Bay in the form of copies of canceled check(s) with a confirming statement from Basin Street that these canceled check(s) represent the $454,481 owed to [the city] by BSP.” Marengo also wrote to Basin Street’s general counsel, Paul Andronico, requesting copies of canceled checks made out to North Bay worth $454,481 and a “confirming transmittal letter.”

In a recent interview with the Bohemian, Andronico said that Basin Street made a “voluntary contribution” to compensate the city for the disallowed remediation work, and claimed that the $454,481 was applied by Basin Street as a credit to the city”. Andronico said he does not know why the city has no documented confirmation that Basin Street ever made the required payment to North Bay; nor could he himself provide proof of payment. Nor could he specify what work was performed by North Bay to satisfy the credit due to Petaluma.

Normally, a developer working for the city is required to provide, before being paid, a “certified payroll” and other documentation that details the progress of each week’s work, including payments to laborers and subcontractors. Danly said that neither the city nor Basin Street can locate a certified payroll identifiable as work performed for the $454,481 in question. Nor can city officials find invoices attesting that the additional North Bay work was ever performed. Danly could not locate the required copy of a canceled check, nor a transmittal letter confirming payment to North Bay of the credited amount [see .pdf]. Danly said the city’s accounting books “appear to confirm said payment was made” but he offered no proof that it was made.

When the Bohemian requested copies of Basin Street and North Bay construction invoices from the city, Danly replied, “Staff conducted a diligent search but was unable to locate the actual invoices.” He said the documents may have been routinely destroyed, but he offered no record of such destruction. But in 2005, the city had provided the Bohemian with two electronic disks containing all of the records on the Theatre District project, including many of the invoices it currently cannot find. We have offered to make these records available should the city wish to revisit the Theatre District fiasco and recover funds from Basin Street Properties and North Bay Construction. (Danly, who negotiated the project agreements, and was paid $89,000 from the Theatre District budget, says he will accept the disks.)

The final audit reconciliation for the Theatre District project records $704,000 in “Developer Contributions.” This includes the aforementioned check from Basin Street for $250,000, and $454,000 that is variously coded in the city’s accounting system as “in-kind” and “donation.” [see .pdf] Unlike other line items in these financial records, the nature of the “donation” is not explained. In fact, it repeatedly moves in and out of the city’s ledgers like a poltergeist that cannot decide to stay or go.

Nonetheless, it appears that Basin Street still owes the city nearly half a million dollars. The question is: Who will ask for it?

Petaluma City Manager John Brown did not respond to requests for comment.

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