Palo Alto will cancel its option agreement to buy the two Park Boulevard properties where city officials hoped to build a new public safety building.

But it could wind up with a better deal overall on the properties due to declining real-estate values, according to city staff.

The City Council voted unanimously Monday night to terminate the option agreements the city signed with two property owners more than year ago to purchase properties at 2785 and 2747 Park Blvd. The agreements would have enabled the city to buy a 1.51-acre site at 2785 Park Blvd. for $10.9 million and to buy a .3 acre site at 2747 Park Blvd. for $2.4 million, respectively.

But the recent drop in property values and the city's projected $10 million budget shortfall in fiscal year 2010 ended that. City Manager James Keene and the council agreed that Palo Alto's deals with the two property owners -- Essex Park Boulevard, LLC (which owns the larger property), and Brown-Fairchild Investment Company, LP -- aren't as advantageous as they once seemed.

"We're all painfully aware of the city's budget constraints," Keene told the council Monday night. "When several years ago, the city entered into option agreements, no one at that time could've anticipated where we are today.

"The future of the local commercial real estate market is still very uncertain," he added. "The Essex and Brown properties have significantly decreased in value and the options are now considerably above the market."

But city officials aren't giving up on the two properties just yet. Keene said the owners have recently offered the city significant price reductions and the city is considering a "land banking" option. Under this alternative, the city would buy the land and develop it after its financial outlook improves. The city would also have the option of selling the land.

The council unanimously agreed to allow staff to continue negotiating with the property owners. The council would still have to approve any land purchases.

"This is a good example of us acting in a business-wise manner," Councilman John Barton said Monday. "This makes a great deal of sense."


The city has spent $726,945 on option payments to the two property owners so far. Another $1.2 million has gone into design work for the new public building. The city halted the design work at 35 percent because of the darkening financial climate.

Keene told the council staff would come back in about a month and present several alternatives for a proposed public safety building. These include using the mezzanine inside City Hall to expand the current police headquarters and splitting up police operations over multiple facilities.

The city's previous timeline for the $68 million project no longer applies, he noted.

"It doesn't much matter if it's $50 million, $60 million or $70 million," Keene said.

"It's a whole lot of money that we don't have right now."