Missing $73K Prompts City to Sue Sycamore North Leasing Manager

The City of Hercules is suing commercial marketing and leasing manager Craig Semmelmeyer and his company for clearing $73,000 out of an operating account that the city was supposed to have control over, court records show.

Semmelmeyer did not respond to a Patch phone call but replied about the claim with an email. “I deny that there was any wrongdoing at any time by me or by my company's,” Semmelmeyer wrote. “The matter is now in the hands of my attorneys to respond to the city in court.”

The $73,000 was made up of prepaid rents and deposits from Patxi’s Pizza, Boracay Grill and the Bean Bag Café. Semmelmeyer, who heads Lafayette-based Main Street Property Services, Inc., negotiated leases with the three businesses for spots in Sycamore North, a mixed-use building that has 40,000 square feet of ground-level retail space with 96 residential units on top. Sycamore North currently sits half-built, set back from the corner of San Pablo and Sycamore avenues. It is owned by the Hercules Redevelopment Agency, which has acted as the developer on the project.

For the leases, the city paid Main Street $88,626 in commissions—half of what it would be paid when Sycamore North was complete and the shops were open for business. Patxi's Pizza has since canceled its lease agreement with Sycamore North, while the other two businesses remain committed, Hercules Municipal Services Director John Stier said. Stier has overseen the Sycamore North project in recent months.

In November 2010, the city sent a letter to Main Street its agreement with the company.

Then-interim City Manager Charlie Long, who at the time had less than two months on the job after taking over for embattled City Manager Nelson Oliva, put out a shortly after attempting to cancel its agreement with Main Street.

In the report, Long wrote that the city had negotiated “undesirable business terms” with Main Street. He said that when he became city manager, the city had a draft agreement that would give Main Street the option to buy Sycamore North for up to five years after it was built without regard to how much the property made in rents. "That would essentially tie up the asset (Sycamore North) for up to five years," former city Spokeswoman Michelle Harrington said shortly after the agreement was canceled. The report also said the city was giving Main Street tenant improvement allowances of $95 per-square-foot, which was twice the normal market rate at the time.

The inflated tenant improvement allowance coupled with Main Street's potential option to buy without considering costs prompted the city to cancel its agreement with the company, the report said.

Semmelmeyer told Patch at the time that he was “blind-sided and a little shell-shocked” by the situation.

Sometime after the agreement was canceled was when Main Street took the $73,000 to continue to pay itself management fees, leaving 39 cents behind, the city’s claim said.

Because there was no termination clause in the agreement, Semmelmeyer, who was the only signatory on the account, argued that the city didn’t have the right to terminate the agreement when it did, Stier said. Stier, who came to work for Hercules long after the agreement with Main Street was first signed, said he did not know why Semmelmeyer's was the sole signee on the account.

At a February city council meeting, Stier said Main Street asked for $224,000 to sever its contract, but city staff did not agree to pay that severance.

Sycamore North, which broke ground in May of 2009, is about half built. The city has slowed construction to a halt to contain costs on the project, which has bled the city of roughly $35 million so far, requires about the same amount to be completed and, on the low-end, has been valued at $25 million.

Stier said the city has considered selling the project, lowering its considerable affordable housing mix or even tearing part of the building down.

The city’s claim against Semmelmeyer and Main Street was filed with the Contra Costa Superior Court. It is scheduled for its first court hearing in November.